Suddenly I experienced a surge in the amount of opportunities coming my way these few weeks. Being faithful to the teachings in the topic of Economy during my times in the commerce faculty back in Junior college and in the stream of electronic commerce back while I was doing my honours in the university, I understood and felt strongly the other side of the equation.
Opportunity cost is defined as the lost incurred when you forego the next best alternative in the process of deciding on one of the available opportunities.
Let me talk in layman terms for your better understanding. Suppose one day you decide to spend 5 hours of your time reading a book in the library instead of spending those 5 hours sitting by the beach and reading the same book. The opportunity cost to you in this situation is the joy you feel when you sit by the beach. In this scenario, the cost is hard to quantify.
Let me illustrate for you a better example which I will draw from a real life situation.
Client A approaches me presenting before me a deal that could potentially make $4000. It requires an upfront investment of my real time of 80 hours. (as opposed to virtual time – aka asynchronous delay or some one else’s time) There exist 2% chance of complications happening. (this we will define as risk)
Client B approaches me at the same time presenting me another deal that could potentially make $10,000. It requires an upfront investment of my real time of 300 hours. (as opposed to virtual time – aka asynchronous delay or some one else’s time) There exist 10% chance of complications happening. (this we will define as risk)
As both clients came to me at the same time in need of my real time immediately, I am now faced with a situation whereby I will need to choose one and forego the other. To a normal person, he would very likely choose the deal that offers $10,000. However on closer inspection, the second deal is not actually a very good deal as compared to the other.
Let me work out the mathetics
Total likely incurrable man hours for deal A – 80 hours X 1.02 = 82 hours
Total revenue receivable $4000
Actual hourly rate for real time sold = $48.5
Total likely incurrable man hours for deal B – 300 X 1.05 = 315 hours
Total revenue receivable $10,000
Actual hourly rate for real time sold = $31.75
Some might explain that the lower rate justifies for the large sum of potential revenue receiveable in deal A. Ok then lets do the math for the other part of the equation still left invisible.
Given this active period in the market, the percentage of closing more deals simlar to A in nature is around 60%. Translated into hours it would be estimated at (315-82 hours) * 0.60 = 140 hours
Appling the prevailings rates in deal A to this equation, I will get 140hours X 48.5 = $6,790
So if I choose to take up deal A and forego deal B, below are the mathematics:
I will have saved [315 – (140+82 )] 93 hours of my precious time and still potentially make [$10,790 – $10,000] $790 more.
Also since, I have a few channels which I could devote my time to build up recurring income, this 93 hours extra time available at my disposal could thus be used to expose myself to the effects of the positive black swan, with zero opportunity cost incurred by me. So basically, the net comparison will be as per below :
[$10,790 +++ versus $10,000 nett]
Actually the equation that brought me to the conclusion of never getting myself employed into a full time job and a fix salary per month is almost similar to this. Get employed with a fix salary of $3000 per month and the possible financial situation you will be facing for the next 12 months will likely be
($3,000 X 12 ) = $36, 000 —
- The minus sign is just in case your boss decides to fire your ass before the year ends.
- also your maximum potential income has been capped at $36,000
Go about living life as a free bird
$0+++ = ???
- Don’t worry God is kind
- you normally won’t die from what you already, it is usually what you don’t know that will kill you.
- You know what is your base but your upper boundary has no limits!
Life is great live free!!!!!