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Can economists tell you what they think about strawberry smoothies?
That depends on the kiwi flavor instead-plus other options as well.
It seems like an opportunity cost issue. What is the definition of opportunity cost in everyday life?
In recent Page One Economics: Money and Missed Opportunities, Andrea Caceres-Santamaria, senior economic education specialist at the St. Louis Fed, explains the concept of opportunity cost as the value of the next-best alternative when a decision is made. What’s up with scarcity.
The Scoop on Scarcity

The Scoop on Scarcity
There are some things in life we cannot have. This is where scarcity comes into play.
In a limited number of things, services, opportunities, time, and money, we can’t fulfill our unlimited wants.Caceres-Santamaria explains that choices and tradeoffs are governed by this concept.
Using the example of deciding to buy a $7 smoothie at the mall, she illustrates her point.
Several people consider that choice as a single one based on whether you want the beverage or not.
Her proposal is to put on “a unique pair of economist’s glasses” to view the decision differently by asking:
- How much does this mean to me?
- What will I have to give up for it?
- If I didn’t have it now, what would I have lost?
Costs That Are Seen and Unseen
In our natural tendency to focus on immediate financial gains and losses, we tend to overlook trade-offs that can affect both our short-term and long-term well being.
Caceres-Santamaria therefore challenges us to consider implicit alternatives as well as explicit alternatives at the time of decision-making-those that are “unseen” opportunity costs.
She writes, “It’s about looking beyond the present and assessing alternative uses of money so that we don’t fall into shortsightedness.”
In addition to opportunity costs, what are some other examples?
An exam is just a few days away, and the night before, a student spends three hours and $20 at the movies.
The opportunity cost is the amount of time and money spent studying versus something else.
Farmer plants wheat; opportunity cost is planting another crop or using the resources (land and farm equipment) in another way.
Commuting by train is less expensive than driving. By comparison, driving takes 40 minutes rather than 70 minutes.
This represents an hour of lost time.
Is Opportunity Cost a Big Deal?
We might not consider lost study time or spending $7 on a smoothie to be costly decisions, but how about the decision to stretch your budget and buy an expensive home instead of a starter home, or to spend $1,500 on a more luxurious trim package for your next car?
As Aceres-Santamaria points out, higher-priced purchases neglect opportunity costs even more.
If the car-buying example is used, the consumer might default to thinking about the $1,500 upgrade in relation to the $18,500 base price of the car.
It might be more useful to ask what else $1,500 could buy than compare the higher configuration to the vehicle itself.
Why the Rush?
According to Caceres-Santamaria, most decisions involving money are based on immediate consumption.
Consumption today is valued more than consumption in the future. As humans, we grow impatient, tugged by the promise of an immediate reward versus a payoff that could be years away.
Seeing is believing, so it makes sense to consider the future value of money — a concept we have all read or heard about in retirement plan literature or from financial advisors.
The Future Value of Money

The Future Value of Money
Example 1: The one-time windfall
Let’s say you received a windfall of $4,000 that you wish to use on a vacation. Sure, why not?
You won’t lose anything if you don’t consider the opportunity cost. You could find yourself with $5,397 in 10 years if you nix the trip and put your money into an income-producing product earning an average annual rate of 3%, compounded monthly.
If you wait another five years, your funds will reach $6,270.
Both examples do not account for inflation and taxes. That’s the additional benefit in monetary terms.
Adding an extra $1,400 or more to your $4,000 could also lead to a host of experiences.
Example 2: Small, regular savings over time
You can use that example to illustrate how to invest a single lump sum over time.
What about the opportunity cost of buying caffè mochas three times a week, which cost $4.49 each?
Imagine the amount of money you could make if you invested $54 every month instead of spending it.
In 10 years, you’d have $7,619 to dip your doughnut into if you dropped the coffee (be careful! ), invested $54 per month at the same 3% return, compounded monthly.
It’s been too long since your regular mocha? The savings would still be $3,554 if you cut the time frame in half to five years.
Again, these amounts do not take into account inflation or taxes. I found these examples particularly striking, especially when one considers that a $4.49 caffè mocha habit over time dwarfs a seemingly larger splurge on a $4,000 getaway trip.
Are you interested in experimenting with your own opportunity cost scenarios?
As a consumer, Aceres-Santamaria advises avoiding “autopilot” mode when it comes to financial decisions.
Think of as many alternative uses for your money as you can, starting with even a pack of gum.
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