Curious Cat Management Improvement Dictionary - Opportunity Cost

Opportunity Cost - an economic concept that looks at not the cost it terms of the outlay of money but in the lost chance to do something else instead of what is chosen.

One reason this concept is important is that most projects you choose to focus on for improvement should have a good result. The key to to select the projects that have the largest positive impact.

If you have an average of 3 hours a week to devote to some new project the cost of that (based on your time) would be that portion of your salary those hours represent. However the opportunity cost of you spending 3 hours on that new project is the lost opportunity to: work on some other new project, possible reading new ideas in the field, exercising, spending additional time coaching various employees, etc.

For an organization, often the opportunity costs of deciding to invest resources in a new product launch is not to launch the other 5 projects under consideration. The organization has enough resources to launch one and so one is selected from the potential launches and the others are not pursued.

I happen to find the definition used by many economist that the "value of the next highest valued alternative" use is less valuable than a less precise definition. For one, often those figures are unknown and unknowable (not everything is reducible to a $ figure. And secondly the cost can change over time. Perhaps when you made the decision the value of the next highest use was low but it turned out 6 months later that conditions changed in a way that made the cost of your decision extremely high because the value of the alternative you chose not to pursue increased dramatically. This is separate from the case where your estimate was just wrong: where you incorrectly estimated the value of an alternative at the time of your decision and the value of the alternative became more obvious over time.

Like many economic concepts it is more helpful in theory than when economist try to quantify it. I majored in Economics. I find economics often want to reduce things to $ when even when it does not make sense. I understand it makes the formulas they like to use work more easily but I think it is better to accept that not everything can be converted to a $ figure, even if that makes things less clear.

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Investing - Management Improvement - Overuse of Antibiotics - Excessive Health Care Costs - Identity Theft