Opportunity Cost -- Principle and Application

When I took my MBA and DBA, I came upon this principle which an accountant, financial or economic analyst should know. It's called "opportunity cost."

As defined by Stephen L. Slavin in his book "Microeconomics", the thing we give up, (i.e. our second choice) is called the opportunity cost of our choice. Therefore, the opportunity cost of any choice is the foregone value of the next best alternative.

There are a lot of ways of using this principle. For example, I am connected with a virtual freelance consultancy where I earn at least $100 a week, granting that I do not leave the house and do not spend money on gasoline or transportation. Once I start meeting my other clients outside my virtual freelance consultancy for a week, my opportunity cost will be $100 for such week, as I have this foregone value of the next best alternative. Consequently, I have to make sure that the earnings I derive from my clients outside my virtual freelance consultancy be more than (or at least equal to) the fees I will collecting should I have been working on my virtual freelance consultancy during such week.

What lesson can you derive from using the principle of "opportunity cost"? It simply means that when you make a major decision in life, make sure that it is worthwhile with a quantifiable value in mind. You should never make choices based on emotions or instinct alone, otherwise you might experience an opportunity loss in economics. Therefore, you must always have a quantifiable basis in making a huge decision in life.

I know a friend of mine who had a lot of job offers. He usually decides the best choice after plotting the pros and cons through a matrix of percentage criteria or a SWOT analysis for every job offer. It sounds really profound and weird if you are to present this to a layman. But what he does in his life makes him stable and successful in his career.

On the other hand, financial analysts or entrepreneurs make huge decisions in their companies after considering the risks involved. But I doubt if they decide based on instinct alone; they also decide on the basis of a calculated risk assessment.

There are a lot of people out there who just decide on pure emotions without any calculated assessment in mind. Man is created as a rational being; it's time to use that gift in making decisions in life.

Volcanic eruption of Eyjafjallajökull, Iceland: Effect on the Air Transport Industry

The April 2010 volcanic eruption of Eyjafjallajökull, Iceland, has caused enormous disruption to air travel across Western and Northern Europe over an initial period of six days.

As a consequence, almost 63,000 flights within, to, and from Europe were canceled, creating the highest level of air travel disruption all over the world ("Iceland Volcano Ash Coming To America") (FOXNews.com, published April 19, 2010)

The International Air Transport Association (IATA), through its Director General and CEO Giovanni Bisignani estimated that the airline industry worldwide have lost $1.7 billion in revenues, affecting 29% of global aviation and 1.2 million passengers a day.

Although the air transport industry had lost a lot of revenues during the havoc, it still boils down to the rationale for the laws governing air transportation, that "Safety is the first priority."

Should the transportation companies be held liable for the damages caused to stranded passengers on the ground due to breach of contract of carriage (or known as "culpa contractual") I answer in the negative.

Under the International Convention for the Unification of Certain Rules Relating to Damage Caused by Aircraft to Third Parties on the Surface (Rome, May 29, 1933), it specifically states that:

“ARTICLE 2
“(1) Damage caused by an aircraft in flight to persons or property on the surface gives a right to compensation on proof only that the damage exists and that it is attributable to the aircraft.
“(2) The above provision includes—
“x x x.
“(b) damage caused by any person on board the aircraft, save in the case of an act unconnected with the management of the aircraft committed intentionally by a person not being a member of the crew, and without the operator or his servants or agents having been able to prevent it.
“(3) The aircraft is deemed to be in flight from the beginning of the operations of departure until the end of the operations of arrival."

By implication, an operator may not be held liable for damages in case the damage existed by reason of an act not attributable to the aircraft. Volcanic eruptions that spawned may be classified as a "force majeure," an act of God, or an extraordinary event or circumstance beyond the control of the parties. This is a kind of circumstance which is beyond the control of the operator which exempts him from any liability whatsoever.

In conclusion, let us not forget that safety of passengers is the first priority in the enforcement of laws governing air transportation.