I know, I know – economics? But the basic concepts of economics do have a lot to do with money on an everyday level- I promise!
I love listening to a podcast from NPR called Planet Money. This summer they did what they call “Planet Money Summer School“. They picked some previous podcasts and then had economists discuss the basic concepts in them.
I’m going to talk about two of those concepts in this first Economics 101 post:
- Opportunity Cost
- Sunk Cost
Opportunity Cost
An opportunity cost is what you lose when you have to pick on alternative over another. There are so many ways this plays out in everyday life:
- You want to lose weight, but choose to eat an extra donut. So – you have the happiness of eating the donut, but you lose the opportunity to cut calories there.
- You’re trying to save money – but get invited on last-minute getaway with friends. You have a great time and great memories – but now you haven’t saved that money.
- You have a great job opportunity so you take it – but it comes with a longer commute. So you are happier at your job, but you have less time for leisure when you get home.
Sunk Cost
A sunk cost is money that has already been spent and cannot be recovered. I knew someone who’d started a four-year degree at university in something that really didn’t interest them and they already planned to do another degree once they finished their first one. But – they felt they HAD to finish their first degree since they’d already put time and money into it. So – a sunk cost.
The problem with this thinking is that they were just throwing money and time away. If they had no interest in the degree and were never going to get any use out of it, there was no point in wasting more money and more time finishing the first one.
People run into sunk costs all the time – whether it’s years in a relationship, money put into a car or house, or even an investment – it’s very hard to know when to walk away!
The Takeaway
I hope you’ve enjoyed your introduction to Economics 101! Opportunity costs are something we come across almost daily. This morning I chose to take a long nap! It was nice – but it means I have less time to get everything else on my schedule done today. For a sunk cost- I think I’ve definitely held onto some investments longer than I should have!
What’s a time in your life you’ve had to deal with an opportunity cost or sunk cost?
