Understanding opportunity cost

An opportunity cost is the cost of choosing not to do something.

Here’s an example.

You are self employed and have booked a holiday overseas at a cost of R90 000 plus airfare of R20 000. Just before your holiday is about to start, you get an offer to present a series of seminars on the benefits of natural foods, which is what your company sells. The organisers, Health Magazine, will pay you R130 000 for the seminars.

If you decide to continue with the holiday, there’s a a dual opportunity cost. One is easy to calculate – it is the R130 000 fee that you will not earn. The other is the value of the free promotion of your company and its products that would flow from the seminars. You estimate this to be R230 000.

So what is your holiday actually costing you? The actual outlay (R90 000 + R20 000) + the opportunity cost (R130 000 + R230 000) = R470000!

It may still be worth it, but at least be aware of the cost of your decision.


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