Opportunity Cost

Finding your perfect path

op·por·tu·ni·ty cost

ɑ̀pərtúnəti kɑ́st

noun

ECONOMICS

noun: opportunity cost; plural noun: opportunity costs

  1. the loss of potential gain from other alternatives when one alternative is chosen.
  2. “idle cash balances represent an opportunity cost in terms of lost interest”

 

Every time we choose a path or a door or a window, we’re leaving behind unexplored options. We’re leaving behind things that might have worked out better, benefits that we might not be able to get any other way. The opportunity cost of choosing one option is equal to the aggregate of the benefits of the foregone options. What I mean is, before we make major decisions, we should always consider what we’re giving up by choosing one path over another.

In business school, they teach you the economic principle of opportunity cost really simply. They teach you to quantify the value of each of the options and ask you which opportunity you should select; and sometimes that’s easy, like in problems like this:

Q: Some of your friends have invited you to go to a birthday dinner this Friday for a close acquaintance of yours. If you attend the celebration, you expect to pay $25 for dinner and $5 for a birthday card. It costs you $2 to bus from your house to the restaurant because your car is not working. If you decide to go to the birthday dinner, you will drop your car off at the mechanic on Friday morning. The mechanic has informed you that the simple repairs will cost $200. Alternatively, you can spend Friday learning about the simple repair for your car from an online webinar that costs $40 and you will be able to fix the car that evening. What is the opportunity cost of going to the dinner?

  1. A) $30              C) $192

 

          B)$32               D) $194

A: The answer here is D: $194 and it can be calculated pretty simply. The opportunity cost of going to the dinner equals all of the benefits (money) you would have made/kept if you stayed home. So, the opportunity cost =

                                      $25 for dinner

                                    + $5 for a card

                                    + $4 to bus there and back

                                    + $200 for the mechanic

                                    – $40 for the webinar

opportunity cost =   $194

While this was simple to calculate as a math problem, remember that not every decision in life can be brought down to dollars and cents so simply. Even this issue of going to the dinner or staying home has implications beyond the figures listed. 

The issue of opportunity cost comes up a lot in business; often by accepting one contract, it means our business will not be able to take on another one. Or sometimes we have to think carefully about the benefits and drawbacks of choosing one supplier over another. Like in the example above, a lot of the pros and cons of these kinds of decisions can be quantified and weighed against each other. However, a more fundamental example opportunity cost that every entrepreneur has had to ask at some point is:

“Should I operate this business or should I do something else?”

It’s such a simple question but it’s one that some entrepreneurs have to ask themselves every morning. While I recognize that there are many entrepreneurs of necessity – or people who have exhausted all other options except going into business for themselves – I argue, that more often than not, each time an entrepreneur decides to open a store, start a foundation, launch a website or otherwise start his or her organization, he or she is giving something up. Further, I argue that more often than not, we as entrepreneurs have to consciously make the choice – sometimes every day – to get up and keep pursuing our goals and to not give up to work on someone else’s goals. Because that’s all entrepreneurship really is: it doesn’t matter what your goal or vision is, being an entrepreneur is about creating your dreams – about not sacrificing your vision for someone else’s. However, no life is without sacrifice and if you’re unwilling – as an entrepreneur often is – to sacrifice your professional vision, oftentimes that sacrifice is paid in other aspects of your life.   

Some decisions are straightforward and the opportunity cost doesn’t really factor into our choices – but sometimes the opportunity cost can be crippling and it can make us not want to choose the path that we intellectually know is the right one. This is often because opportunity costs are not necessarily financial costs – sometimes the opportunity cost is a personal cost. Think back to our example and really put yourself in the situation. You might know that it makes more financial sense to stay at home and fix the car yourself, but you have to remember that it can be difficult to decide to stay in and work and miss an event that your partner, friend or child has asked you to attend. As an entrepreneur, you often need to be working when you’d rather be with family or friends. We all know of the personal sacrifice it can take to run a new business alone and, unfortunately, this is part of the opportunity cost of being an entrepreneur. Sometimes that opportunity cost won’t feel like much; a few missed family breakfasts, a few missed movie nights. But sometimes the opportunity cost can feel like it outweighs the benefits of entrepreneurship. Benefits like independence, personal fulfillment, supporting community or family. Just because the opportunity cost is high, does not mean that entrepreneurship isn’t worth it, or isn’t the right path for you.

Every entrepreneur turned to entrepreneurship for a reason; maybe that was to escape an unfriendly job market, maybe it was to turn a lifelong passion into a career, maybe it was to create some value for a community or family. Whatever the reason, I want you to know that that reason alone can be enough. There is definitely a high opportunity cost of entrepreneurship – there are mental, spiritual, physical, familial and financial opportunity costs that are part of choosing this path, but there are also amazing benefits. Each morning, if you wake up and think to yourself “is this worth the sacrifice? Should I continue with this business?” know that we, your community of Indigenous entrepreneurs, teachers, mentors, and friends, support your decisions. We believe in your visions and we want you to know that if you believe that pursuing this venture idea is the best decision for you, your family and your community, then we are here to support you. Lean on your fellow entrepreneurs and your family – use their strength when yours is running low.

The opportunity cost of running a business is a high one. But the reward for getting your vision just right – with no major sacrifices to the structure or content of your idea – can provide you benefits, both financial and personal, for years. Before you think about throwing in the towel and giving up on your dream of being an entrepreneur, turn to your support system because the opportunity cost might not be as high as you think it is!

If you need a mentor or a chance to network with other Indigenous entrepreneurs, check out the Okwaho Network. If you need someone to talk to about your business situation leave a comment below or email us at aceprogramcommunications@gmail.com and we can work on a solution together.

As always, stay sharp!

Jordyn