Definition of 'Opportunity Cost'
Opportunity cost is an essential concept in microeconomics that defines the relationship between choice and scarcity. Opportunity cost is what you give up in rejecting one choice in favor of making another if resources are limited and that choice must be made. It is also described as the value of the best alternative forgone.
TheStreet Explains ‘Opportunity Cost’
There is an unwritten competition among economics textbook writers looking to illustrate opportunity cost using shoes, carrots, marbles, and any number of prosaic objects. Regardless, opportunity cost combines two existential realities: we all have choices to make and there is a cost associated with making those choices. Opportunity cost represents risk in that way. When the outcome between two choices is uncertain, you risk making a choice that renders fewer benefits than another choice. Your opportunity cost is the difference between the benefit of one choice and the drawback of the other. That difference may be quantified, as in time lost during a commute or a return on investment (ROI). That difference may also be qualified, as in the enjoyment seeing one movie over another (both of which start at the same time) or the health benefits of spinach over romaine (if you’re ordering that virtuous salad at lunch).
To put it another way, and contribute to the pantheon of opportunity cost examples, let’s say you’re going from Boston to New York for a long weekend. You could drive via I-95 through Providence, New London, and New Haven (3.5 hours), and deal with parking and tolls, or you could take Amtrak (5 hours). If you take the train, your opportunity cost is arriving later than if you had driven and spending less time in the city. On the other hand, if you drive, your opportunity cost is the chance to relax with several delicious beers in the café car.
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