Do economists think strawberry smoothies are a good idea? A lot depends on the kiwi flavor instead – plus a range of other options. This raises the question of opportunity cost.

What is the definition of opportunity cost in everyday life?

Andrea Caceres-Santamaria, the senior economic education specialist at the St. Louis Fed, explains “opportunity cost” in a recent Page One Economics article: Money and Missed Opportunities. let us now mention some examples of opportunity costs.


examples of opportunity costs

examples of opportunity costs

What are examples of opportunity costs?

Examples of opportunity costs, Life doesn’t allow us to have everything we want. This is where scarcity enters the picture. Despite our limitless wants, goods, services, time, money, and opportunities are limited.

In other words, it is this concept that influences choices – and, consequently, costs and trade-offs, says Caceres-Santamaria.

For example, she decides to purchase a smoothie for $7 at the mall. The author notes that many people would view the choice as a single one based on whether you want the drink or not.

As a result, she suggests putting on “a unique set of economist glasses” to see the decision differently, asking:

  1. What is the value of this to me?
  2. What am I willing to sacrifice to have it?
  3. Can I gain this in the future if I lose it now?

Costs That Are Seen and Unseen

It’s easy to focus on immediate financial trade-offs, but long-term trade-offs can affect more than financial well-being.

Therefore, Caceres-Santamaria encourages us to look at not just explicit alternatives-the choices and costs available at the time of decision-making-but also implicit alternatives, which involve “unseen” opportunity costs.

The key is to look beyond the present and determine what else can be done with the money – that is, not to be short-sighted.

Are there any other examples of opportunity cost?

The night before an exam, a student spends three hours and $20 at the movies. The opportunity cost is the time spent studying and the money spent on something else.

When a farmer decides to plant wheat, he is faced with the opportunity cost of planting a different crop or using alternate resources (land and farm equipment).

Commuting by train is faster than driving. It takes 70 minutes on the train versus 40 minutes on the road. The opportunity cost is an hour spent away from work.

Is Opportunity Cost a Big Deal?

Is Opportunity Cost a Big Deal

Does Opportunity Cost a Big Deal

Losing study time and spending $7 on a smoothie might not seem like costly decisions, but what about the bigger decisions — like whether to buy a more expensive home than a starter home or to spend $1,500 more on an upgraded trim package for your next car?

Acres-Santamaria describes how opportunity costs are neglected even more when making higher-priced purchases. For example, a car buyer might default to considering the subsistence value of $1,500 of the $18,500 base price of the car.

In addition to comparing the fancier configuration to the vehicle itself, it might be more helpful to ask what else $1,500 could buy outright.

Why the Rush?

“We make most of our money-related decisions based on immediate consumption or consumption sooner rather than later,” Caceres-Santamaria notes. “Consuming now is more rewarding than the thought of consuming later.”

Human nature tells us we grow impatient when promised benefits versus a payoff that will possibly take years to materialize.

If seeing is believing, it makes sense to look at the future value of money, an idea we have all read about or heard about in retirement plan literature.

The Future Value of Money

Example 1: The one-time windfall

You got a surprise $4,000 windfall, so why not use it for a getaway trip? Since it is found money, you have no loss unless you consider the opportunity cost.

The money you would have saved if you had invested in an income-producing instrument with an average annual interest rate of 3%, compounded monthly, would have grown to $5,397 after 10 years.

Five years from now, your funds could reach $6,270.(Neither example takes inflation into account.).

As an added benefit, you’ll also want to consider the experiences that an extra $1,400, or more of your $4,000, can afford you.

Example 2: Small, regular savings over time

This is an example of investing a single lump sum over time. Are you aware of the opportunity cost associated with daily purchases, such as picking up a $4.49 caffè mocha three times a week? You could earn a lot more money from investing $54 a month rather than spending it.

In 10 years, if you dropped your coffee (take care! ), invested $54 per month, and earned the same 3%, compounded monthly, you would have $7,619 to dip your doughnut into.

Is it too long to give up that regular mocha?

If you cut the time frame in half to five years, you would still save $3,554. (Again, these numbers do not take into account inflation or taxes.)

Especially when you consider that a $4.49 caffè mocha habit over time can dwarf splurging on a $4,000 getaway trip, these examples are striking.

Do you want to test your own opportunity cost scenarios? Acres-Santamaria advises consumers to avoid making financial decisions on “autopilot.” Start small-even if it is just a pack of the gum-and brainstorm as many alternatives to using for your money as you can. 

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