P05 · Lesson 1 of 10 · 10 min · 4 hands-on tasks
Opportunity Cost
Every yes is a no to something else. The real cost of a choice is the best thing you gave up, and money already spent shouldn't change your mind.
🎬 Situation
Jada runs The Loft, a 400-person music venue. Friday night, she can host her own concert, rent the room to a company party, or run a quiz night. The concert makes a profit, so it seems like an easy yes.
But "profitable" and "the best choice" aren't the same thing. Economics starts here.
🎮 Play
What does Friday really cost? Set the money each option brings in. The chosen option's real cost includes the best one you gave up.
The concert makes money, but another option makes more. Its economic profit is negative: choose the other one.
The sunk cost trap. Jada has already paid a deposit. Ticket sales are disappointing. Should she still put on the show?
Go ahead: the show covers its extra costs. Now slide the deposit up and down: the answer never changes.
🏷️ Name it
| Term | Meaning | The Loft |
|---|---|---|
| Opportunity cost | The best alternative you give up | The $6,000 party |
| Accounting profit | Revenue − explicit costs | $4,500 from the concert |
| Economic profit | Accounting profit − opportunity cost | −$1,500 |
| Sunk cost | Already spent, can't be recovered | The $3,000 deposit |
| Trade-off | Getting more of one thing means less of another | One Friday, one event |
🖍️ Like you're five: you have time for one game after school: football or the swings. If you pick football, the "cost" isn't money: it's the swings you didn't get. And if you already lost your hat at the swings yesterday, that shouldn't decide today's game.
Real life: companies keep pouring money into failing projects because "we've already spent so much": the sunk cost fallacy is one of the most expensive mistakes in business. And economists remind founders that running a "profitable" small business can still be a loss if they could earn more doing something else.
🔨 Do it: 4 tasks
0 / 4 doneTask 1 of 4 · The best alternative
Jada can use The Loft on Friday for her own concert (expected profit $4,500), rent it to a company party for $6,000 (no extra costs), or host a quiz night (profit $1,500).
If she chooses her own concert, what's the opportunity cost?
Task 2 of 4 · Economic profit
The concert's accounting profit is $4,500, and the opportunity cost is $6,000. What's the economic profit?
Task 3 of 4 · Sunk cost
Jada paid a $3,000 non-refundable deposit to a band. Ticket sales are weak: the show will now bring in $5,000 of ticket revenue and cost $4,000 more to run (staff, sound, the band's balance). Cancelling saves the $4,000.
What does putting on the show add, compared with cancelling?
Task 4 of 4 · Your own time
Jada spends a whole Saturday painting the venue herself to "save" $800 on painters. She could have spent the day booking events worth $2,000 of profit. What should she conclude?
🧩 Case: The festival weekend
⭐ VIPA city festival asks to rent The Loft for its whole weekend for $18,000. Jada already planned three concerts that weekend, expected to make $14,000 in total, and she's paid $2,500 of non-refundable deposits to the bands.
How should she compare the options?
What would you do? VIP members make the call, see what happens next across 2 decisions, and get the expert debrief.
🔁 Remember it
Opportunity cost is...
A sunk cost should...
A business makes an accounting profit of $50,000, but the owner could earn $70,000 working elsewhere. Its economic profit is...
Opportunity cost = the value of the best alternative you give up. Economic profit = accounting profit − opportunity cost. Sunk costs (already spent, can't get back) should be ignored when deciding what to do next.
📅 Use it Monday
Pick one project or meeting on your calendar this week. Ask: what's the best alternative use of that time? If it's worth more, move it.
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