Opportunity cost is the value of the next best alternative that you give up when making a choice. It represents the potential benefits or profits that are foregone by choosing one option over another
. For example, if a company invests money in new equipment instead of the stock market, the opportunity cost is the return it could have earned from the stock market investment
. This concept applies to money, time, resources, or energy used in decision- making. It helps individuals and businesses weigh the costs and benefits of different options to make better decisions
. Opportunity cost is not usually recorded in accounting but is important for strategic planning and economic analysis
. In simple terms, opportunity cost can be calculated as: Opportunity cost = Return on the best foregone option − Return on the chosen option For instance, if investing in the stock market yields a 10% return and investing in equipment yields 8%, the opportunity cost of choosing equipment is 2%
. Overall, opportunity cost reflects the trade-offs inherent in decision- making due to limited resources and helps guide more profitable or efficient choices
