Opportunity cost is the value of the next best alternative that is forgone when a decision is made to choose one option over another. It represents the potential benefits or gains that are missed out on because resources (such as time, money, or effort) are limited and must be allocated to one choice instead of another
. In economics and business, opportunity cost helps evaluate the trade-offs involved in decision-making by quantifying what is sacrificed in terms of returns or benefits from the option not chosen. For example, if a company invests in new equipment expected to yield an 8% return instead of investing in the stock market expected to yield 10%, the opportunity cost of choosing the equipment is the 2% higher return forgone from the stock market
. Opportunity cost includes both explicit costs (monetary expenses) and implicit costs (non-monetary factors like time or lost pleasure), and it is a crucial concept for efficient resource use and strategic planning. It is not typically recorded in accounting profit but is essential for understanding the true economic cost of decisions
. A simple formula to calculate opportunity cost is:
Opportunity Cost=Return on best alternative−Return on chosen option\text{Opportunity Cost}=\text{Return on best alternative}-\text{Return on chosen option}Opportunity Cost=Return on best alternative−Return on chosen option
This formula helps businesses and individuals assess which option provides the greatest benefit relative to the alternatives
. In summary, opportunity cost is the cost of what you give up when choosing one option over another, guiding better decision-making by highlighting the value of the foregone alternatives.
