This Video Will Cost You $100 Dollars - Opportunity Cost Explained - FutureIQ

3,273 views Wait, is this logic right? • Dec 22, 2023

Slog Reference: Understanding Opportunity Costs

Description

Opportunity cost is one of those economic concepts that will change your decision-making forever once you understand it clearly. But it is quite difficult to grasp the concept if you just got to know the term. Therefore, we've brought you more than 10 examples in this video to help you understand it better.

Hope you enjoyed FutureIQ by Navin Kabra and Shrikant Joshi. Do hit us up on Twitter:
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More videos for you:
Sunk cost fallacy: https://youtu.be/pgH79XsGlo4

00:00 Introduction
01:05 Opportunity cost
01:59 Example
03:30 Example 2
04:54 Example 3
05:55 Example 4
07:23 Example 5
09:00 Example 6
09:40 Example 7
11:00 Example 8
11:35 Example 9
12:16 Where does it not apply?
13:48 Baumol's cost disease
15:20 Example 10
18:50 The conclusion

#futureiq #opportunitycost

Related Slog Matches

Understanding Opportunity Costs

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Transcript

- shant how much does it cost our viewers to watch this episode Nothing free wrong answer right you have not been paying attention to our own episodes we talked about dollar value of time so at least it is dollar value of time but today we want to talk about how it costs even more right watching an episode yes because the cost of watching this episode is all the things you didn't do instead of watching this episode right instead of watching this episode you could have been watching anur stock tips Channel and learn about stocks or you could be doing a course on corsera or you could be playing a game with a friend right you could be spending time

0m 46s with loved ones right you could be doing exercise all of those things are something you give up to watch this episode none of those things seems as appealing as this huh of course but keep in mind that that's even spending time with loved ones I know where I know where your brain went yes so that is the cost of this episode okay and this is the key fact that I think um a survey of a large number of economists said that this is the concept that is the most important Concept in economics this is called opportunity cost oh I've heard about this yeah so something that you are doing or taking or a choice you make

1m 31s huh right is never free right always you have to look you can't look at just what it costs you in terms of money or effort or time you also have to look at what did you give up to get here and that is opportunity cost right so in economics there is a well-known phrase saying that there ain't no such thing as a free lunch I've heard that yes right so no lunch is ever free so earlier episode we had taken an example of a time sharing holiday company that offers you a free lunch to listen to their pitch right yeah so how much did that lunch cost you nothing I didn't pay for it they gave me

2m 13s lunch they expect you to buy a time share which I didn't buy right but you're going to feel guilty about it I am Shameless enough to not feel guilty about so you are saying it really cost you nothing right but the point of this episode is that it did cost you that you didn't do something else with that time of yours right you could have been doing IIT Madras data science online course and significantly improved your scope right so opportunity cost is what else did you give up well in my case it madas data science doesn't really hold that much of an for me so I could have probably gone hunting for good sound effects or good pieces of

2m 59s sound to incorporated into my next project or something like that but yes I get what you mean I could have been doing something that were that would have been a better use of my time correct so that's the opportunity I gave up that's the cost in terms of opportunity you gave up opportunity cost you know although it's it's a difficult concept to grasp right so that's why we are going to go through a lot of examples of opportunity cost right seems like a fairly straightforward concept if you're doing something then you're not doing something else so now think of it this way right uh I mean you just finished 12th standard and a local College uh is

3m 36s providing four years of free education wow okay right would you take it or what is the opportunity cost there uh the opportunity cost is do is is it is it a subject that I want to do versus it's a subject you want to do uh then I don't know what's the opportunity cost there the opportunity cost is that if this college is not a great college and there's a much better College elsewhere where it costs you money to go there correct but you are going to get a much better education which sets you up for the rest of your career then you are giving up an entire career and that's the opportunity cost you're right right

4m 15s or let's say a different way of looking at it is you don't have money let's say anyway to go to the better college but you are giving up the opportunity of say just just joining a company as an intern at something and Lear learning on the job so you have spent four years learning something useless right that's a different kind of opportunity cost I I can make a list of people I know who shouldn't have spent four years in college right ouch not holding anything back today are we but yes I I get it now fine so another example okay 35 years ago an uncle of mine bought a plot for five lakh okay right and today it is two

5m 03s crores it's a huge amount of money it is and it's like a ridiculous return right so0 40x yeah um right what is the opportunity cost here how many years ago did he buy it 35 35 years ago so that is basically yeah uh how much did the stock market appreciated in that exactly that is the opportunity cost right if at that time he had put money in the stock market I mean just just in some regular mutual fund H today it would be five crores okay not 2 crores 100x wow right so you can't just see the return you got on this thing you have the opportunity cost is where else could you have invested it in and what would you have

5m 50s gotten there right that's a opportunity cost true so um third example okay this is from Economist interesting y economist Shane Frederick okay so he was shopping for a uh music system okay and there was a Pioneer one for $1,000 and a Sony one for $700 and he spent an hour debating the different features and is this I can imagine or not right the Pioneer actually is a better sound system but the Sony has better Electronics uh and the Sony 700 Buck cheaper so the salesperson who was worried that this guy is going to get Choice overload and just not buy anything at all we've done an episode on that check it out sales guy said this

6m 36s which do you want H right the Pioneer just by itself or the Sony and $300 worth of CDs right in those days people used to buy music on CDs right but suddenly the choice was made for him like okay I'll buy the Sony but then the sales person lost the commission on the Pioneer which would have been greater not having sold anything would have been much worse for him right so opportunity cost again look at the the salesman's opportunity cost also right yeah so it was not just the buyer's opportunity cost it was the salesperson's opportunity cost as well exactly so um and just think of it right none of these are something that you would have

7m 19s thought of opportunity cost by yourself you need a little help there yeah um another example uh comes from my friend uh Ashish Kar right okay which is in education uh in our education right we are teaching the kids like a bunch of subjects and every year uh not every year every some number of years we add more subjects we add more topics uh to be covered and just generally everyone thinks of this as a good thing yeah right but this is a bad thing which you understand only after thinking about the opportunity cost right I mean you think it doesn't cost you anything to put in stuff and more Concepts to be taught right yeah but the opportunity cost what

8m 04s you're giving up in return is that the concept each concept is not being taught with that much level of detail you are spending less time on each concept you're doing less practice on each concept right I think most of our students would be far better off if we taught them one tenth of what we are teaching we are teaching the syllabus is reduced to 10th but we spent a lot of time on each with actual real life applications this I agree we need to teach a lot more fundamental stuff and uh we need to teach it a lot more rigorously and then teach them how to apply it by themselves there that is the concept of opportunity cost there is no

8m 47s cost to stuffing more topics into the syllabus the cost is you're giving up on the applications the practice and so on right and same thing in a restaurant in a restaurant menu just adding more items to the menu has an opportunity cost in terms of you know your chefs will not be experts in the a few things now they have to do a whole number of things and they'll do all of them mediocrely Jack of all quines master of none correct plus you're going to give customers uh Choice overload yeah um we did an episode on that so that's an opportunity cost right yeah so many things that you don't think about actually are uh somehow a manifestation

9m 33s of opportunity cost yes so opportunity cost let me take the most famous example from Bollywood okay in D do you remember amitab bachan telling Shashi Kapur this is the greatest example of opportunity cost okay what amitab ban got G and bang andal and bank balance and in return what did he give up [Laughter] m i don't believe it he actually gone and converted an iconic Bollywood scene into a future IQ episode concept convert all bwoods right the entire movie zmd Rik rhan discovers opportunity cost of his highflying career right so many highflying careers in Bollywood I think andwood you may have completely ruined movies for me now you like appreciate them more I don't know if I can appreciate

10m 46s them more but you have definitely changed movies for me now I will never be able to see movies the same way again I can ruin like celebrities also for you please go on watch on I mean imagine that there are people out there right those who are fans of Elon Musk right they should think of elen musk taking over Twitter not as a celebration but look at the opportunity cost of that the more time he spends on Twitter the less time he spends on the Rockets and the cars which are truly world changing opportunity cost man fine I anyways don't like what that person is doing to X or Twitter or whatever he wants to call it now but I

11m 33s do say I do see the advantage of that particular opportunity cost another great example of opportunity cost is Warren Buffett right one of the richest people in the world spends eight hour a week playing bridge online right imagine the opportunity cost there right 8 hours of Warren Buffett's time per week is God knows how many billion dollars right so the bigger question is is he any good at it and where does he play he is the plays so much Bridge because that's the only game at which he can beat Bill Gates so damn it which means I can't even play against him and take some of his money he has lots of it anyway needs

12m 10s to give some of it to me Warren Buffett Buffett Buffett Warren Buffett give me your money but tell me this does opportunity cost apply like in every situation because what if there are there is no alternate opportunity yes so opportunity cost obviously depends on what opportunities are there and opportunity or opportunity I don't know whatever it is figure out the right pronunciation and I I'll also do it later sorry go on H if there are no opportunities no I mean what opportunities are there that decides what the cost is and it differs from situation to situation person to person right okay take government jobs in India now everybody knows that a government job doesn't pay very well does not

12m 50s depending on your position you get additional sources of income additional sources of income but that might or might not be a large amount right so what is the opportunity cost of taking a government job right clearly um if you could get a high paying job in the private sector a lot of people prefer that right so in Maharashtra government jobs are not as sought after as in Bihar because in Bihar the private sector jobs are not there the opportunity cost is lower whereas in Maharashtra they are there so the number of youngsters applying to upsc is much higher there than here that's opportunity so basically wherever there is a market of options there is opportunity cost to be

13m 38s considered corre is what it comes down to O interesting the other very interesting application of opportunity cost has to do with a concept called bomal cost disease we might do an episode on that I won't explain it in detail today but basic idea is this right that just because software industry in India has been growing like crazy and the salaries in that industry have been growing like crazy that's why and that is growing because there's a huge Market in the US for software and in the US people are paying huge amounts for software correct that's why this is growing but because of that salaries in other Industries in India which don't have as big of a

14m 22s market there nothing changed but their salaries have to increase because for the employee staying here as an opportunity cost otherwise they can switch over to software right so in areas where there has been no change in skills or no change in anything not just that uh it is because that these salaries are so high that the cost of everything else is also High which is why they Sal in other domains need to go up to match the purchasing power of everybody in it and computers and software and whatnot right so one of the disease did you say so one of the things I wanted to get across in this episode was that opportunity cost seems obvious I mean you said it this is

15m 08s obvious but it is not really as obvious right me some of it is obvious but there's a lot of it that is not it's like the tip of the iceberg only 20% is obvious 80% is not so obvious correct so let us take another very interesting example okay um imagine there is an Arijit Singh concert Right tickets are 1 rupes and you are a huge fan you want to take your significant other to this concert you want two tickets and you go stand in line and the tickets get over just when you land sounds about right sounds like my K right next door are these people selling it in black and they are saying 10,000 per

15m 49s ticket and you say well my significant other is a huge fan but 10,000 is too much agreed correct agreed right the way to think you think about it is that with I'm not paying 20,000 bucks to watch Arijit Singh no matter how big a fan my significant other the way to think about it is that in 20,000 you can go for so many nightclubs you can pay the DJ to play Arijit sing songs you can buy so many uh uh subscriptions of Spotify where you can just listen to Arijit on a loop right so this is how you yourself with opportunity cost what can I do with the 20,000 yes okay now let me ask the

16m 34s tricky question okay okay you go away you choose not to take the 20,000 carut tickets okay okay on the road you find two tickets Fallen somebody who bought the tickets lost them and there is no way for Finders Keepers we are going to watch no you are a very honest person but there is no way to trace that those people so now you have two tickets we go watch why because they were free see think of this this is where you are not getting the opportunity cost concept right I am not you were these tickets you know if you go back there and stand next to the scalpers you'll be able to sell them for 20,000 so these tickets

17m 18s are worth 20,000 and you have already decided that you don't want to spend 20,000 on this so why will you go to the concert you should sell those tickets but the tickets are free I didn't it cost you 20,000 if you go to the concert you give up on 20,000 that you could have gotten but I found them for free I didn't have to pay 20,000 that's what the opportunity cost is not easy to understand right part of the problem I mean I I kind of get what he's trying to say but my brain still keeps saying the tickets are free correct it's free the part of the problem is that psychologically I mean theoretically we

17m 58s understand 20,000 20,000 right in this case if it was not worth 20,000 then in this case it shouldn't be worth 20,000 but yeah our brain does not think of getting 20,000 in the same way as losing 20,000 okay it's called loss aversion so when you had to pay 20,000 it seemed like no I'm not going to do that but when you're getting 20,000 it's like no not a big deal I prefer this no because in in my head the tickets are not worth 20,000 so maybe if if the tickets were wor if the scal but that's why but still you are not willing to sell the tickets for 20,000 which you are getting right there

18m 35s yeah because the value of the experience is much higher than the more you explain it you're going to confuse yourself and the viewers right just admit it that this is difficult right okay it is difficult I agree admit it is difficult so what is the conclusion of this entire thing how do I deal with opportunity cost First of all understand that nothing in life is free that's true Everything has opportunity cost yeah second is try to analyze the opportunity cost in everything right normally we don't we just just take it we just look at the monetary cost or effort but we don't think of what am I giving up right so for example your social media use you

19m 20s think of oh Twitter is free Facebook is free no it is not there is a big opportunity cost but don't overdo this analysis okay you will get into trouble think if I start analyzing the opportunity cost for every action of mine I'll never be able to take any action in life think of the opportunity cost of getting married right what you are giving up on all possible future romantic Leones by getting calling home right now I'm calling your home right now and telling them to put a leash on you you have been talking about a lot of weird things naen so look at this man opportunity cost of marriage he says don't overdo it but yes

20m 04s intellectually think about it there you go train yourself to think about opportunity costs Shri naen future IQ thank you no opportunity cost here good thing you watch till the end thank you for watching till the end if you like this episode check out these others you might like them all so and please share with your friends I'm sure they will also like these thank you