# What Is Opportunity Cost? – How do you Calculate Opportunity Cost?

What Is Opportunity Cost? Opportunity cost is a fundamental economic concept that refers to the cost of not choosing the next best alternative. In other words, it’s the cost of an opportunity forgone in order to pursue a certain action or decision. Opportunity cost is an important concept to understand, as it plays a role in virtually all economic decisions made by individuals, businesses, and governments.

## What Is Opportunity Cost?

Opportunity cost can be defined as the value of the next best alternative that must be sacrificed in order to pursue a certain action or decision. It’s the cost of choosing one option over another. For example, if you choose to spend money on a vacation, the opportunity cost is the money you could have used to pay off your credit card debt.

Opportunity cost is not always measured in terms of money. It can also refer to time, effort, and other resources. For example, if you choose to study for an exam, the opportunity cost is the time you could have spent working or socializing.

### Types of Opportunity Cost

There are two types of opportunity costs: explicit and implicit.

• Explicit opportunity cost refers to the out-of-pocket expenses that are incurred when choosing one option over another. For example, if you choose to go to college, the explicit opportunity cost is the tuition and fees you pay to attend.
• Implicit opportunity cost refers to the opportunity cost that is not reflected in monetary terms. For example, if you choose to work overtime, the implicit opportunity cost is the time you could have spent with family or pursuing hobbies.

### How do you Calculate Opportunity Cost?

Opportunity cost can be calculated using the following formula:

Opportunity cost = Value of the next best alternative – Value of the chosen option

For example, if you have the choice of going to a movie or going out to dinner, and you choose to go to a movie, the opportunity cost is the value of going out to dinner.

### How Opportunity Cost Works

Opportunity cost refers to the potential benefits that are foregone when choosing one option over another. In other words, it is the cost of the next best alternative that must be given up in order to pursue a certain action or decision.

Opportunity cost is important to consider in decision-making because it helps us to evaluate the true cost of our choices. It helps us to weigh the benefits and drawbacks of different options and make informed decisions based on the potential trade-offs. By considering the opportunity cost of our choices, we can make more effective use of our resources and achieve better outcomes in the long run.

### Importance of Opportunity Cost

Understanding opportunity cost is important because it allows individuals and organizations to make better decisions. By considering the opportunity cost of a decision, they can make informed choices that maximize their resources.

Opportunity cost also plays a significant role in the economy as a whole. Governments must consider the opportunity cost of their policies and programs in order to allocate resources effectively.

Real-life examples of the impact of opportunity cost include the decision to go to college, the decision to buy or rent a home, and the decision to invest in a particular stock or bond.

### Opportunity Cost in Decision Making

Opportunity cost can be used as a tool in decision-making. By considering the opportunity cost of a decision, individuals and organizations can evaluate the potential benefits and costs of different options.

For example, if a business has the choice of investing in a new product line or expanding its marketing efforts, it can use the concept of opportunity cost to determine which option is more beneficial. By considering the potential costs and benefits of each option, the business can make an informed decision that maximizes its resources.

The advantages of considering opportunity cost in decision-making include reducing the risk of making poor decisions and maximizing the potential benefits of a decision.

### Conclusion

Opportunity cost is an important economic concept that refers to the cost of not choosing the next best alternative. By understanding the concept of opportunity cost, individuals and organizations can make better decisions that maximize their resources. Whether it’s deciding to go to college, investing in a new product line, or choosing to spend money on a vacation, opportunity cost plays a significant role in our daily lives.

### FAQs

#### What is another word for opportunity cost?

Another word for opportunity cost is “trade-off”. In other words, a trade-off is a sacrifice or compromise that must be made in order to choose a particular option. When we make a trade-off, we are giving up one thing in order to gain something else, and the value of what we give up is the opportunity cost of our decision. So, in essence, opportunity cost and trade-off are interchangeable terms that describe the same concept.

#### What is opportunity cost and advantages?

Opportunity cost is the value of the next best alternative that must be given up when choosing one option over another. By considering opportunity cost, we can make better decisions and use our resources more efficiently. It helps us weigh the benefits and drawbacks of different options. Ultimately, understanding opportunity cost can lead to better outcomes in the long run.