However wealthy and influential we may be, we can never find enough hours in the day to do everything we want. Economics deals with this problem through the notion of opportunity cost, which simply refers to whether someone's time or money could be better spent on something else.

Every hour of our time has a value. For every hour we work at one job we could quite easily be doing another, or be sleeping or watching a film. Each of these options has a different opportunity cost -- namely, what they cost us in missed opportunities.

Say you intend to watch a football match but the tickets are expensive and it will take you a couple of hours to get to and from the stadium. Why not, you might reason, watch the game from home and use the leftover money and time (the time you'd have spent in pre- and post-match traffic) to have dinner with friends? This -- the alternative use of your cash and time --- is the opportunity cost.

Another example is whether or not to go to university. On the one hand, years spent there should be richly rewarding, both intellectually and socially; graduates also tend to receive better job opportunities. On the other hand, there is the cost of tuition, books and coursework. However, this ignores the opportunity cost: for the three or four years you are at university you could quite easily be in paid employment, earning cash and enhancing your CV with valuable work experience.

Forgone Opportunities

The concept of opportunity cost is as important for businesses as for individuals. Take a shoe factory. The owner plans to invest $500,000 in a new machine that will dramatically speed up the rate at which he produces leather shoes. That money could just as easily be put into a bank account where it could earn 5 per cent interest a year. Therefore the opportunity cost of the investment is $25,000 a year -- the amount forgone by investing in the machinery.

For economists, every decision is tempered by knowledge of what one must forgo -- in terms of money and enjoyment -- in order to take it up. By knowing precisely what you are receiving and what you are missing out on, you ought to be able to make better-informed, more rational decisions.

Consider that most famous economic rule of all: there's no such thing as a free lunch. Even if someone offers to take you out to lunch for free, with no expectation that you will return the favor or make conversation during the meal, the lunch is still not entirely free. The time: you will spend in the restaurant still costs you something in terms of forgone opportunities.

Some people find the idea of opportunity cost immensely depressing: imagine spending your entire life calculating whether your time would be better spent elsewhere doing something more profitable or enjoyable. Yet, in a sense it's human nature to do precisely that -- we assess the pros and cons of decisions all the time.

In the world of business, a popular slogan is 'value for money'. People, it is said, want their cash to go as far as possible. However, another slogan is fast gaining ground: 'value for time'. The biggest constraint on our resources is the number of hours we can devote to something, so we look to maximize the return we get on our investment of time. By reading this chapter you are giving over a small slice of your time which could be spent doing other activities -- sleeping, eating, watching a film and so on. In return, however, this chapter will help you to think like an economist, closely considering the opportunity cost of each of your decisions.

Opportunity Cost at Home

Whether we realize it or not, we all make judgments based on the idea of opportunity cost. If your pipes spout a leak at home, you could decide to fix the problem yourself, having worked out that even after you've paid for the tools, the book on plumbing and so forth you will still save a considerable sum compared with calling out a professional. However, the extra invisible cost is those things you might have done with the time spent undertaking the repair -- not to mention the fact that a plumber would probably do a better job. Such an idea is closely tied in with the theory of comparative advantage.

Opportunity Cost in Government

Governments around the world similarly employ the opportunity cost argument when it comes to privatization. They reason not only that public utilities would often be better run in the private sector, but also that the money freed up from the sale could be used more effectively for public investment.

However, decisions taken with an eye on the opportunity cost can often go wrong. Back in 1999, British Chancellor Gordon Brown decided to sell off almost 400 tonnes -- the vast majority -- of the UK's gold reserves. At that point, the gold had been sitting idle in the Bank of England's vaults for many years, and its value had fallen, since many regarded gold as a poor investment. The same cash, had it been invested in securities such as government bonds, would have risen steadily in those previous years. So the UK Treasury decided to sell off the gold for an average price of $276 an ounce in exchange for various kinds of bonds.
Few could have foreseen that less than a decade later, the price of gold had climbed sharply, to just below $981 per ounce, meaning that the gold Gordon Brown had sold off for $3.5 billion would now have been worth some $12.5 billion. The UK government made some profit from investing the proceeds of the sale -- but not a fraction of what it would have made had it left the gold where it was sitting and sold it later. This illustrates one of the perils of opportunity cost -- it encourages you to believe that the grass is always greener.