It’s that time of year again: college graduation! When professors wear ridiculous robes, the band plays Pomp and Circumstance, and weepy parents watch their babies don caps and gowns and walk across the stage to get their hard-earned diplomas.
It’s a magical time, full of hopes, dreams, and, for many graduates, intense anxiety about what’s next.
After diplomas are handed out and the band plays its final tune, it’s time for newly minted graduates to head out into the real world. If you’re in this boat, this may be your first time living on your own, managing your finances, and doing your own grocery shopping. It’s an exciting (and scary) new chapter of life, full of responsibilities and big decisions. And, if you’re like me back in 2013, you’ll probably have little idea what to do or how to make those decisions.
Never fear, economics is here to lend a hand! You're probably thinking, “Economics? You mean that class I never took in college?” Yep, that’s the one!
Most people think economics has to do with investing or the stock market (that’s finance actually). But in reality, economics is mostly concerned with how people make decisions and the ways their choices interact. To that end, the field of economics contains several principles, tools, and frameworks that you can use to think about the decisions you’ll make after school (and those you face every day).
Few concepts are more important than the principle of opportunity cost.
After graduation, you’ll undoubtedly face many decisions: where to live, what to do for work, who to date, and countless others. In each of these choices, you will face trade-offs. If you take a job at a consulting firm, for example, you’ll likely have to travel a lot and won’t be able to sleep in your own bed. If you date Lily or James, you (presumably) won’t be able to date Arthur or Molly. No choice is the “perfect” one because you must always give up something else in order to get it.
Economists like to say that “there’s no such thing as a free lunch.” The idea is that even if someone offers to buy you lunch, the meal isn’t costless. You still “pay” for it in the form of the time you spend at lunch not doing other things (like reading the new book you brought to work or dining with someone more interesting).
In fact, you incur costs with every decision you make. The opportunity cost of a decision is the value of the next best thing you give up to make that choice. In other words, it’s what you sacrifice in order choose one course of action over another.
Post-graduate life (and life in general) is full of opportunity costs that you should account for when making decisions. For example, suppose you’re thinking about going to graduate school. If you do, you’ll need to pay tuition, buy books, and incur other expenses. The full price tag? $100,000 over two years. But the actual cost of attendance is much higher than this!
Why? Because, if you do attend, you forego the salary you could have earned by working. If you could get a job paying $50,000 per year, for instance, the total cost of grad school (accounting for this opportunity cost of not working for two years) has just doubled!
But opportunity costs don’t just factor into career decisions. For example, suppose you’ve gotten a job in a new city and are now looking for a place to live. Your salary is modest, so you are hoping to rent as cheap a place as possible. You look in the city, but the apartments are so expensive! You eventually find a place for $300 per month less than ones right by work, but it is an hour train ride away. Should you take the apartment?
Well, it depends how much you value your time. If you do take it, that’s 2 hours in the car each day. 30 days per month, and that’s 60 hours total of time lost to driving (more with traffic). Is 60+ hours of your time worth $300 dollars to you?
Economics can’t tell you whether or not to exchange time for money. But it can provide important principles and frameworks with which to help you make these decisions.
So when you’re making big decisions as a newly minted graduate, remember to consider opportunity costs—there’s no such thing as a free lunch!
Although, if you do value your time, you can always get lunch delivered.
Interested in learning more about Economics, Financial Accounting, and Business Analytics? Our fundamentals of business program, HBX CORe, may be a good fit for you:
About the Author
Pat is a member of the HBX Course Delivery Team and currently works on the Economics for Managers course for the Credential of Readiness (CORe) program. He is also currently working to design courses in Management and Negotiations for the HBX platform. Pat holds a B.A. in Economics and Government from Dartmouth College. In his free time he enjoys playing tennis and strumming the guitar.