Every choice has a trade-off. That’s the principle behind opportunity cost in economics. But how do you explain it to your kids? And why is it a vital concept for them to grasp early on in life? Keep reading for tips on how to explain opportunity cost to kids, why it’s important for their financial literacy, and activities to teach them how it works.
What is opportunity cost, and how to explain it in simple terms
When you’re presented with a choice, the opportunity cost is the value of what you don’t pick. In other words, it’s the value of the choice not taken.
The simplest way to illustrate this is to present kids with a choice of two different sweets. Let them pick one. The one they didn’t choose is the opportunity cost.
When you’re sure they’ve grasped this, explain that sometimes, we have more than one option to choose from. When that’s the case, opportunity cost is the value of the next-best alternative.
To demonstrate this, now hold out three types of sweets. Tell your child they can only pick one, but have them name their second choice too.
Their second choice is the opportunity cost. The cost of missing out on their second favourite. The third sweet is not counted as an opportunity cost. And the same would be true if you presented them with four, five, six, seven, or a hundred choices of sweets. The opportunity cost is always the value of the second-best choice you give up.
Why is it important to teach kids about opportunity cost?
We can’t have everything we want in life. Our wants are limited by supply, money, energy and time. And these, in turn, drive our choices. Teaching kids about opportunity cost is important because it helps them understand the trade-offs in making decisions.
When kids learn about opportunity cost, they start to understand that every decision they make has consequences. For example, say they’re deciding to buy a £5 toy. The choice isn’t just based on whether they want the toy or not. There are 3 things to consider:
How much do they value this toy?
What are they giving up now to buy it?
What are they giving up in the future to have it now?
Explain to your kids it’s not just the immediate trade-off you need to weigh up, it’s the long-term impact your decision will have on you. Weighing opportunity cost means thinking beyond the present and assessing alternative uses for your money. It’s about being far-sighted, not short-sighted.
Spending £5 on a toy now means they won’t have £5 to spend another way: on burgers and fries with friends, for example. They will also have less to put aside for trainers they’re saving for, so they’ll have to wait longer to buy them.
Understanding opportunity cost helps children make better-informed decisions about their spending. Reinforcing the value of money and how to delay gratification, it’s a money management skill that’ll set them up for the future.
“Practising making decisions, learning the benefits of delayed gratification, planning for the future, and creating savings goals are important skills for kids to learn,” says Beth Zemble, GoHenry’s VP of Education. And as money habits are set by age 7, the sooner they start learning, the better.
Related: Teaching kids about money
Examples of opportunity cost in everyday life
Here are some examples for kids of opportunity cost in everyday life:
Choosing to play video games instead of doing homework, the opportunity cost is time lost, possible lower grades and less free time later on.
Deciding to spend money on a toy instead of saving it, the opportunity cost is not having enough money to buy something different or valuable later.
Choosing to watch TV instead of going outdoors to play: here, the opportunity cost is missing out on exercise, fresh air and socialising with your friends.
Deciding to eat junk food instead of healthy food: the opportunity cost is potentially poorer health and lower energy levels.
Choosing to stay up late instead of going to bed at a sensible time: feeling tired and less focused the next day is the opportunity cost.
How can kids calculate opportunity cost
In business, opportunity cost can be calculated using a formula where CO = return on Chosen Option, and FO = return on Forgone Option (or the option not chosen). It looks like this:
Opportunity cost = FO - CO
It’s basically the difference between the returns you expect to make on each option.
For kids, it’s easier to use a simple decision-making process instead.
What are your options? Start by identifying the choices available.
What are the benefits and costs of each option? Work out what you gain from each option and what you give up by choosing it.
What’s the opportunity cost? Decide which choice offers the most benefit to you for the least cost.
Try using an example to illustrate this process.
Let’s say you have £20 to spend, and you’re trying to make up your mind whether to buy a new video game or go see a movie with friends.
What are your options?
Buy a new video game or see a movie with friends
What are the benefits and costs of each option?
Buying a new video game:
Benefits: Entertainment, can play with friends
Cost: £20 spent on the game, less time to spend with friends.
Seeing a movie with friends
Benefits: Socialising with friends and watching a new movie.
Costs: £10 on a movie ticket, less time to play video games.
What’s the opportunity cost?
Having compared the benefits and costs of each option, you decide that going to see a movie with friends offers the most benefits for the least cost. The opportunity cost of this choice is the £20 video game you could have bought.
Activities to teach your kids about opportunity cost
Kids learn best by doing. So here are some activities you can do with your kids to teach them about opportunity cost.
Give your child several options and have them make a choice. Then ask them what they gave up to make that choice. For example, give your child the option of playing outside or playing video games. If they choose to play video games, ask them what they gave up by not playing outside.
Take your child with you to the supermarket. Give them a set amount of money to spend. Have them make choices about what they want to buy and think about the cost and benefits of each item. For example, did they choose a bag of chips over a piece of fruit? What did they give up by not choosing the fruit?
Ask your child to make a list of things they want to do, then have them prioritise each based on what they value most. Explain to them they may not be able to have everything they want, so they’ll have to make trade-offs. For example, if they want to go to a birthday party, but they have a football game that day, they may need to pick one over the other.
What’s for dinner
Look for moments you can talk about opportunity cost with your kids in daily life. For example, get them to decide what to make for dinner. Discuss the opportunity cost of choosing one recipe over another based on the time each option will take and the ingredients needed.
Tips for teaching kids about opportunity cost
Start by explaining opportunity cost in simple terms. Use real-life examples your child can relate to, like watching TV or going out with friends.
Encourage your child to think about the benefits and costs of each option. For example, if they choose to watch TV, they may miss out on having fun with their friends.
Help your child identify the opportunity cost of their choices. If they spend their allowance on sweets, for example, they may not have enough money left over to buy the clothes they want.
Use trade-off scenarios to teach your child about opportunity cost. Ask them to choose between spending their money on a new video game or saving it for a bike. Help your child understand what they are giving up by picking one option over the other.
Encourage your child to make informed decisions by weighing the benefits and costs of their options. Teach them to think about the long-term consequences of their choices, such as saving their pocket money for a big purchase instead of spending it all at once.
Use scenarios your children can relate to, like deciding how to spend their pocket money or which activities to do in their free time. Help them understand every choice has an opportunity cost, and they need to think about the consequences of each before making a decision.
How can GoHenry help?
GoHenry is a prepaid kids' debit card and app for kids aged 6-18 and is a great way to teach your kids about opportunity cost. You can pay their allowance through the parent app, giving your kids the chance to learn how to manage their money themselves.
They can put their opportunity cost lessons into practice by deciding how to spend their pocket money. And set savings goals for big-ticket items like trainers or game consoles. This will help them understand the opportunity cost of spending their money on smaller items instead of putting it towards a larger goal.
You can also set spending limits, which will help teach them about trade-offs. And because you get notified in real-time every time your child makes a purchase, you can talk to them about their choices and encourage them to think through their spending decisions.
What’s more, through our in-app Money Missions tool, your kids can hone their money management skills. In fun, bite-sized interactive games and videos.