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What is opportunity cost? A definition and examples

What is opportunity cost? A definition and examples

Introduction

Opportunity cost is a concept that is used to describe the value of the next best alternative that must be given up in order to pursue a particular action. In other words, opportunity cost is what you sacrifice when you make a decision. This can be a valuable tool in helping you make more informed decisions in your personal and professional life.

What is opportunity cost?

Opportunity cost can be defined as the value of the next best alternative that must be given up when making a decision. It’s important to note that opportunity cost is not always monetary in nature. For example, if you choose to spend your time studying for an exam, the opportunity cost is the time you could have spent doing something else, like going to the gym or spending time with friends.

Examples of opportunity cost

Let’s take a look at a few examples to help illustrate the concept of opportunity cost:

Example 1: Choosing between two job offers

Imagine you have been offered two job opportunities. The first job pays $50,000 per year and has great benefits, but requires you to work long hours. The second job pays $45,000 per year and has decent benefits, but has a much more relaxed work schedule. In this scenario, the opportunity cost of choosing the first job is the extra leisure time you could have enjoyed if you had chosen the second job. On the other hand, the opportunity cost of choosing the second job is the extra money you could have earned if you had chosen the first job.

Example 2: Deciding whether to invest in a new project

Suppose you own a business and are trying to decide whether to invest in a new project. The project requires an initial investment of $100,000, and is projected to generate $150,000 in revenue over the next year. However, there is some risk involved, and the project could potentially fail, resulting in a loss of the initial investment. In this scenario, the opportunity cost of investing in the project is the potential revenue you could have generated if you had invested the $100,000 in a different project, or simply kept it in the bank.

How to make informed decisions using opportunity cost

Opportunity cost can be a valuable tool in helping you make more informed decisions. By considering the potential costs and benefits of different options, you can make a decision that is best for you in the long run. Here are a few tips to help you make more informed decisions using opportunity cost:

  1. Consider all the options: When making a decision, it’s important to consider all the available options and their potential costs and benefits.
  2. Identify the opportunity cost: Once you have identified all the options, think about the potential opportunity cost of each option. What will you have to give up in order to pursue this option?
  3. Evaluate the potential costs and benefits: Finally, evaluate the potential costs and benefits of each option, taking into account the opportunity cost. This will help you make a more informed decision that takes into account the potential trade-offs of each option.

Conclusion

Opportunity cost is an important concept that can help you make more informed decisions in your personal and professional life. By considering the potential costs and benefits of different options, and the opportunity cost of each option, you can make a decision

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