Use opportunity cost · printable packet

A choice's opportunity cost is the value of the best alternative it gives up; compare every choice with that alternative rather than with nothing, work its edge, and price the owner's own time to find what the business earns after it.

Paper packet. Every task here also exists on screen, where it is checked automatically; answers written on paper are not assessed by Nydus. When you are back at a device, enter your answers there.

1. What you will learn

You will find the opportunity cost of a choice, compare options against their opportunity costs, work each option's edge, price the owner's time and find what a business earns after it, and compare hourly returns.

2. What you already have

A decision break-even compares a choice with doing nothing. But the kiln, the van or the owner's Saturday could usually be doing something else. The real comparison is with that — the idea you met as relevant cost in the money course, now applied to the business's scarcest resources.

3. Words for this lesson

4. Compare with the best alternative, not with nothing

Each is better than an empty kiln, so compared with nothing every option looks good. But she can only fill the kiln once. The opportunity cost of the café order is the best thing it gives up — the Christmas stock, 420 — not the two added together, since she could never have done both.

$$\text{edge} = \text{value of the choice} - \text{value of the best alternative}$$

The café order earns 500 against an opportunity cost of 420: its edge is 80. The Christmas stock earns 420 against an opportunity cost of 500: its edge is −80, and choosing it would leave 80 dollars on the table, though its own figures look fine.

Term	What it means
Opportunity cost	The value of the best alternative given up by making a choice.
Best alternative	The most valuable other use of the same resource, which could have been had instead.
Scarce resource	Kiln time, a van-day, the owner's hours: something that cannot do everything at once.
Edge	A choice's value less its opportunity cost; below zero, money left on the table.
Profit after the owner's time	The business's profit less the owner's hours priced at their best alternative.

Another way: table

Maya's week of kiln time.

Option	Value	Opportunity cost	Edge
Café order	500	420	80
Christmas stock	420	500	−80
Gift-shop batch	380	500	−120

Another way: steps

Name the scarce resource the choice uses.
List everything else it could be used for.
Value each in the same terms, usually contribution.
Take the best alternative as the opportunity cost.
Work the edge, and weigh what the numbers leave out.

5. The method, step by step, and how to check it

Name the resource. Opportunity cost belongs to a scarce resource, not to a choice in general: this week's kiln, Saturday's van, the owner's evening. A resource with spare capacity has no opportunity cost, because using it gives nothing up.

List the real alternatives. Only uses that could actually happen count: the café order that has been offered, not the one Maya hopes for. Doing nothing is always on the list, but rarely the best alternative.

Value them alike. Contribution for business uses; the pay of the best available job for the owner's time.

Take the best, not the total. The resource could only have done one of the alternatives, so only the best is given up.

Check by working the edge for every option: exactly one should come out above zero (unless two tie), and it should be the most valuable. If two options both show a positive edge, one of the opportunity costs has been taken as the total rather than the best.

6. The owner's own time

In a small business the scarcest resource is usually the owner's time, and it is the one most often priced at zero. Monica's stall makes 450 dollars on a Saturday before paying her anything, and takes 10 hours. If her best alternative is a job paying 30 dollars an hour, her time's opportunity cost is 300: the stall earns 150 beyond the job, and her hours at the stall bring 45 dollars each. If the alternative paid 50 an hour, the stall would be 50 dollars behind, though its books would still say 'profit'.

This is why an owner's pay is not the same as a business's profit. The books show profit before the owner is paid; the honest question is whether that profit beats what the same hours would earn elsewhere. A business that does not, year after year, is being subsidized by its owner's time.

7. What the numbers leave out

Opportunity cost is not a reason to drop anything that earns less than the best alternative. Owners value independence, flexible hours, learning, and building something they may sell later, and those count. A market stall that earns a little less than a Saturday job may be worth keeping because it is growing, or because Monica prefers being her own boss.

The point is to know the number, so the choice is made with open eyes. An owner who says 'the stall earns 50 less than a job, and I keep it because it is mine and it is growing' has made a decision. One who never priced the time has only made an assumption.

8. 'Instead of what?'

Every yes in a busy small business is a no to something else. The owner who agrees to a small, fiddly job on Thursday afternoon has also agreed not to spend that afternoon on the quote for a large one, the monthly review, or the call to a lapsed customer. Asking 'instead of what?' before saying yes turns an invisible cost into a visible one. It is the same question as the focus lesson's ranking by contribution per scarce hour, asked one decision at a time.

9. Opportunity cost and cash

Opportunity costs never appear in the books or the bank account, which is why they are easy to forget and why they matter. They also change: a kiln week has a high opportunity cost in November, when Christmas stock sells well, and a low one in January. Deciding in January as if it were November turns down work that would have filled an idle kiln. Price the alternative for the week in question, not for a typical week.

10. When a resource is full, and when it is not

Opportunity cost matters most when a resource is full, and least when it is not. In a quiet week, an empty kiln slot has no better use, so a small, low-paying order costs nothing to accept; in the busiest week of the year, the same order pushes out a better one. The same job can therefore be worth taking in January and worth declining in November, and an owner who uses a single rule for both will be wrong half the year.

A simple way to handle this is to set a minimum rate for the scarce resource that changes with the season. Maya might decide that in November every kiln week must earn at least 450 dollars of contribution, because that is what Christmas stock earns, while in January any order that earns more than its variable costs is welcome. Northside Repairs might decide that Saturday bench time must earn 60 dollars an hour in summer, when the queue is long, and anything above its costs in winter. The minimum rate is the opportunity cost made into a rule that staff can apply without asking.

The owner's own time follows the same pattern. An hour on Tuesday morning, when the business is quiet, may have a low opportunity cost and be the right time for bookkeeping or a supplier meeting. An hour at the Saturday peak has a high one, and spending it on paperwork gives up sales. Planning the week so that low-value tasks fall into low-value hours is one of the cheapest improvements a small business can make.

Opportunity cost also explains why saying no can be the most profitable thing an owner does. A small job accepted at the busiest time is not simply a small gain; it is a small gain minus whatever better use the time would have had. Owners who learn to see that trade are able to turn down work politely, recommend someone else, and keep their best hours for their best customers.

11. In the world: an accountant who kept doing her own bookkeeping

A self-employed accountant with a growing client list spent about 20 hours a month on her own firm's bookkeeping, filing and invoicing. It felt free, because she was paying no one to do it. A colleague asked her what those 20 hours would bring if she spent them on client work instead: her clients paid 90 dollars an hour, and she had a waiting list.

The opportunity cost of her own bookkeeping was 20 × 90 = 1,800 dollars a month. A local bookkeeper offered to do the work in about 12 hours at 40 dollars an hour, 480 a month. Hiring her would give up 480 of cash and free 20 hours worth 1,800 of client work, an edge of 1,320 a month — provided the waiting list was real and she actually used the hours for clients rather than letting them drift.

She hired the bookkeeper, took four clients off the waiting list, and tracked the hours for three months to be sure they were going to paid work. They were: her billed hours rose by 18 a month. The same arithmetic later persuaded her to keep one task she could have handed off — meeting new clients herself — because the edge there came from the relationships, not the hours.

12. In the world: why economists put opportunity cost first

Economics begins with scarcity: resources cannot do everything at once, so every use has a cost in the uses it rules out. The idea is old and simple, and still one of the most useful checks a small business owner can run before saying yes.

13. Where this goes wrong

A choice is good if it earns more than nothing. Compare it with the best alternative.

Opportunity cost adds up all the alternatives. Only the best one could have been had.

Spare capacity has an opportunity cost. If nothing else could use it, nothing is given up.

The opportunity cost is the cheapest alternative. It is the best one given up, because that is what the choice actually costs the business.

Opportunity cost is a reason to refuse small jobs. Only when the resource is full; in a quiet week, a small job gives up nothing and earns something.

A job that pays well per hour is always the best use. Compare it with the other jobs the same hours could do, on the same week's demand, not with an average week.

Only money has an opportunity cost. An owner's hours, a van's days and a kitchen's shelf space are all spent on one use instead of another, and each can be priced by what the best alternative would have earned.

14. Northside Repairs' Saturday

15. Monica prices her Saturday

16. Maya's kiln week, worked in full

17. Your turn: a van-day at Bright Home Cleaning

18. Guided practice

Maya has one free week of kiln time. A café order would earn $539$ dollars of contribution, a stock of mugs for the Christmas market $326$ dollars, and a batch for a gift shop $578$ dollars. She can fill the kiln only once. If she takes the café order, what is its opportunity cost, in dollars?

19. Guided practice

Complete the worked solution: Monica's stall makes $590$ dollars of profit on a Saturday before paying her anything, and takes $10$ hours of her time. Her best alternative is a Saturday job paying $32$ dollars an hour. Price her time.

20. Guided practice

Maya has one free week of kiln time. A café order would earn $552$ dollars of contribution, a stock of mugs for the Christmas market $555$ dollars, and a batch for a gift shop $470$ dollars. She can fill the kiln only once. Fill in the opportunity cost of each option, in dollars.

21. Practice

Maya has one free week of kiln time. A café order would earn $480$ dollars of contribution, a stock of mugs for the Christmas market $420$ dollars, and a batch for a gift shop $330$ dollars. She can fill the kiln only once. Which use of the week is worth more than its opportunity cost?

22. Practice

A craft booth makes $470$ dollars of profit on a market Saturday before paying its owner, and takes $10$ hours. The owner could instead work a Saturday shift at $37$ dollars an hour. Fill in the comparison, in dollars.

23. Practice

Northside Repairs can spend Saturday on walk-in repairs, worth $610$ dollars of contribution, on a fleet contract's bikes, worth $470$, or on refurbishing used bikes to sell, worth $680$. If Dev chooses the walk-ins, by how many dollars is that better than the best alternative he gives up? Write a shortfall with a minus sign.

24. Somewhere new

A freelance designer has one free week of about $26$ hours. She is offered a logo job paying $546$ dollars, and a regular client has a website job worth $1118$ the same week. Fill in her comparison, in dollars.

25. Lesson test

Lesson test: one question per skill, one attempt each, no hints. Your answers are checked when you submit.

26. Test question

Monica's stall makes $750$ dollars of profit on a Saturday, after all its costs but before paying her anything, and takes $10$ hours of her time. Her best alternative is a Saturday job paying $63$ dollars an hour. What does the stall earn once her time is priced at that rate, in dollars? Write a shortfall with a minus sign.

27. What you can do now

You can ask 'instead of what?' and put a number on the answer. Tell someone why a stall with a profit can still cost its owner money. Next: costs that are already spent.

Working for the steps left to you

	Opportunity cost, dollars
Café order
Christmas stock
Gift-shop batch

	Amount
Owner's time at the shift rate
Profit after paying for that time
Booth's return an hour

	Amount
Logo job's opportunity cost
Logo job's edge over it
Logo job's return an hour
Website job's return an hour

$400 - 360 = 40$

The better use of the day.