Opportunity Cost

Published Jan 12, 2023

Definition of Opportunity Cost

Opportunity cost is defined as the cost of an alternative that must be forgone in order to pursue a certain action. That means it is the potential benefit of the next best alternative that we miss out on when we don’t choose it. Or in other words, it is the cost of what we have to give up in order to get something else.

Example

To illustrate this concept, let’s look at a simple example. Imagine you are deciding between two job offers. The first job pays USD 50,000 per year, and the second job pays USD 60,000 per year. You decide to take the second job, which means you have to give up the first job. In this case, the opportunity cost of taking the second job is the USD 50,000 you would have earned if you had taken the first job.

However, please note that opportunity costs don’t necessarily have to relate to money. In fact, more often than not, it’s really hard to value forgone benefits in money. For example, when you decide to go to the beach with your friends instead of spending time with your family at home, the opportunity cost you face is the potential benefit you could have derived from spending time with your family. This is obviously really hard to measure in dollar terms, but still an important factor to consider when making your decision.

Why Opportunity Cost Matters

Opportunity cost is an important concept in economics and decision-making. It helps us to understand the trade-offs between different options and to make better decisions. By taking into account the opportunity cost of a certain action, we can compare the costs and benefits of different alternatives and make an informed decision.

This is also quite important when it comes to investments because the opportunity cost of an investment is the return that could have been earned if the money had been invested elsewhere.