Opportunity Cost

Opportunity cost results from the fact that most resources that need to be allocated are often scarce. This leads to the necessity of trade-offs which in turn lead to opportunity cost. Opportunity cost, also known as economic opportunity loss is the value of the next-best alternative as a result of making a decision between two options.

Opportunity cost is not measured solely on financial terms. Rather it is considered the true cost of the decision, what must be given up once a decision favoring one of the alternatives has been made, and can be assessed using anything that has value. The definition of opportunity cost can therefore include anything from money, time spent doing the alternative option, peace of mind, pleasure, relaxation, and any other benefit.

Opportunity cost is essential when taking into account the true cost of a decision, especially if monetary indicators are not involved or vague. In most cases, when a price is not attached to a particular option, it is easy to assume that benefits were gathered in return for nothing at all, when it reality this is never the case.

The application for opportunity cost is diverse and includes production possibilities, cost of capital, time management and career choice, among others. A simple example of opportunity cost is when faced with the equally desirable yet mutually exclusive options of going to the opera or watching the Superbowl at home. The choice of going to the opera makes missing an exciting night with friends while watching the Superbowl at home the opportunity cost.