What Is a Low Opportunity Cost?
Opportunity costs in general have to do with the amount of cost that is involved by making some sort of economic decision. Opportunity costs may be somewhat high, indicating that it is necessary to forgo or give up a significant amount of resources in order to take advantage of a given opportunity. With low opportunity cost, the individual has to forgo or give up very little in the way of resources in order to take advantage of an opportunity. It is important to note that measuring low or high opportunity cost requires careful scrutiny of the situation of the individual involved, and what type of chances or resources must be foregone in order to move forward with a specific opportunity.
One of the easiest ways to understand what constitutes low opportunity cost is to consider an individual who has the opportunity to work as a stock person in a supermarket. If that individual does not possess training for some sort of skilled labor and currently has no other job prospects, then choosing to claim this opportunity will not require foregoing any other chances for employment that would be more profitable. This would constitute a low opportunity cost, indicating that the individual can enjoy the benefits of the new job without actually losing very much.
At the same time, if the individual who is offered the stock position in the supermarket has a degree and is actively seeking a position that is relevant to that degree, there is more to lose. This is especially true if the work schedule at the supermarket precludes the ability to aggressively pursue positions that would pay more and be suited to the skills of the individual. Here, the opportunity cost is high, since the individual must give up potential opportunities to secure a job that would pay more and ultimately lead to a career.
Low opportunity cost can be related to just about any type of financial decision. Investors can weigh the pros and cons of investing in one security versus a different one based on what must be foregone in order to hopefully earn the desired returns from the selected asset. If there is a great deal of risk in the security that is selected, that means the investor is probably taking on a high opportunity costs, since he or she could have made money consistently by investing in assets with less volatility. At the same time, an investor who goes with more conservative investments is likely to be assuming a low opportunity cost, since the effort carries less risk and is likely to produce somewhat consistent returns as long as those assets are held.
Assessing opportunity cost can impact all sorts of decisions. Deciding to attend college instead of going directly into the work force means foregoing income now in anticipation of being able to make more money after graduation. Even something as simple as deciding what vegetables to grow in a garden will involve weighing the benefits and liabilities of choosing one vegetable over another, especially in terms of what is anticipated as the outcome of the venture. Since so many variables may affect the decisions, it is usually necessary for the individual to determine if a given decision constitutes a low opportunity cost or a high one.
Good analogy with the stock boys scenario. In the current economy, it's easy to grasp, too. How many people out there are underemployed because they just needed a job -- any job -- to make ends meet?
Anyone with a degree who is trapped in a job that keeps them from seeking something more in line with their education and/or training well understands lost opportunity costs.
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