• Skip to main content
  • Skip to primary sidebar

John Champaign Writes

Adventures in Self Publishing

Analyzing Opportunity Cost in Entrepreneurial Ventures

February 2, 2022 by John Champaign Leave a Comment

photo of women talking beside whiteboard
Photo by ThisIsEngineering on Pexels.com

A Reddit user asked an interesting question about an analytical method for calculating opportunity cost in a car transaction he made.  I felt like the commenters kind of blew it with their suggestions, often only offering “rules of thumb” or general principles in a situation that was quite tractable.

What is Opportunity Cost?

Opportunity cost is a concept from economics that looks at what you miss out on doing one thing instead of another.  If someone only had enough money to buy a ticket to a baseball game or a video game, in each case the opportunity cost is the other item – if he buys the ticket, his opportunity cost is the hours of entertainment he’d have gotten playing the video game; if he buys the video game, his opportunity cost is missing the enjoyment of watching baseball live in person.

So What’s The Opportunity Cost Here?

He’s contrasting two situations, the first where he bought a used car for $630, invested 3 hours of work into the transactions, and sold it for $800.  The other alternative was where he would have bought it for $630, paid $1,000 for repairs, invested between 40 and 60 hours of work on the repairs, then sold it for $2,800.

We’ll ignore the time value of money (buying and selling the first day vs. keeping the car for a week and a half) and any uncertainty in the alternative situation – the repair might have been easier (less than 40 hours) or harder (more than 60 hours) than he anticipated.  He also might not have been able to sell it for $2,800.

In both situations his purchase price is the same, so the only real difference between the two is how much of his time he puts into it and how much money he makes from it.  These can be easily compared.

In the first case, he made $170 in 3 hours, so his labor was worth $56.67 per hour (170 /3).

In the second case, he would have made $1,170 (2800 – 1000 – 630).  If we assume the repairs went well and he finished them in a 40 hour work week, his time would have been worth $29.25 per hour (1170 / 40).  If it took him 60 hours, his time would have been worth $19.50 per hour (1170 / 60).

Dividing the estimated net value of the repaired car, $1,170, by the hourly value of his time, $56.67 / hour, we come up with 20.65 hours.  If he could do the repairs in less time than this, it’s worth doing them.  If it takes him longer, it’s better to sell the car unrepaired.

In Conclusion

Therefore, he made the right decision buying and selling the car unrepaired for $800 with 3 hours of work.  His time would be better spent using the 40 – 60 hours that he would have spent repairing the car on trying to buy other cars cheap then resell them or being paid to work on other cars.

If we value his time at $56.67 per hour, the opportunity cost of repairing the car would have been a loss of $1096.80 (56.67 * 40 – 1170) in the 40-hour repair case and $2304.40 (56.67 * 60 – 1170) in the 60-hour repair case.

Are There Any Other Considerations?

It could be the case that buying this car for $630 and reselling it for $800 in three hours was a rare, magical, unrepeatable event that he is unlikely to achieve in the future.  In this case, he would want to decide if the hourly rate for the repairs ($19.50 – $29.25) is more or less than his time is usually worth.  If he works for minimum wage,  it might be worth the opportunity to make more money than he usually makes working on the car.  If he usually makes more than $30 / hour, then he’s certainly better off making the quick sale and selling it for $800 unrepaired.

Related

Filed Under: Business

Reader Interactions

Leave a ReplyCancel reply

Primary Sidebar

Subscribe to Blog via Email

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

Join 498 other subscribers

RECENT BLOG POSTS

  • An Idea For George R. R. Martin and Patrick Rothfuss On How They Can Finish Their Series
  • Traveler’s Legacy Released
  • Shattered Dimensions Released
  • Expecting Friends And Family To Be Your Audience
  • Other Writers Are Our Colleagues, Not Competition Or Customers

Categories

  • Academic Advice
  • Board games
  • Business
  • Chickens
  • Game Development
  • Real Estate
  • Role Playing
  • Self Publishing
  • Uncategorized
  • Writing Ideas

Archives

  • May 2025
  • March 2025
  • December 2024
  • November 2024
  • October 2024
  • September 2024
  • August 2024
  • June 2024
  • May 2024
  • April 2024
  • March 2024
  • February 2024
  • January 2024
  • December 2023
  • November 2023
  • October 2023
  • August 2023
  • July 2023
  • June 2023
  • May 2023
  • April 2023
  • March 2023
  • February 2023
  • December 2022
  • November 2022
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • June 2022
  • May 2022
  • April 2022
  • March 2022
  • February 2022
  • January 2022
  • December 2021
  • November 2021
  • October 2021
  • September 2021
  • August 2021
  • May 2021
  • April 2021
  • March 2021
  • February 2021
  • January 2021
  • December 2020
  • October 2020
  • August 2020
  • June 2020
  • May 2020

Recent Comments

  • Intelligent Human Being. on The Problem With Online Discussion Forums
  • John Champaign on GameMaker Snakes and Ladders Tutorial
  • ZorgAlmighty on GameMaker Snakes and Ladders Tutorial
  • John Champaign on Other Writers Are Our Colleagues, Not Competition Or Customers
  • John Champaign on Block Fast, Mute Often

Copyright © 2025 · News Pro on Genesis Framework · WordPress · Log in