Opportunity Cost

AAA

DEFINITION of 'Opportunity Cost'

1. The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.

2. The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).

INVESTOPEDIA EXPLAINS 'Opportunity Cost'

1. The opportunity cost of going to college is the money you would have earned if you worked instead. On the one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages.

Here's another example: if a gardener decides to grow carrots, his or her opportunity cost is the alternative crop that might have been grown instead (potatoes, tomatoes, pumpkins, etc.).

In both cases, a choice between two options must be made. It would be an easy decision if you knew the end outcome; however, the risk that you could achieve greater "benefits" (be they monetary or otherwise) with another option is the opportunity cost.

VIDEO

RELATED TERMS
  1. Return On Equity - ROE

    The amount of net income returned as a percentage of shareholders ...
  2. Return On Investment - ROI

    A performance measure used to evaluate the efficiency of an investment ...
  3. Return On Capital Employed (ROCE)

    A financial ratio that measures a company's profitability and ...
  4. Sunk Cost Dilemma

    A formal economic term that describes the emotional difficulty ...
  5. Production Cost

    A cost incurred by a business when manufacturing a good or producing ...
  6. Active Return

    The percentage gain or loss of an investment relative to the ...
Related Articles
  1. The best way to measure the amount of systematic risk an investment has is to look at the investment’s beta.
    Investing

    Systematic Risk

    Systematic risk, also known as volatility, non-diversifiable risk or market risk, is the risk everyone assumes when investing in a market. Think of it as the overall, aggregate risk that comes ...
  2. Risk management is the process of assessing, managing and also mitigating losses.
    Investing

    What is Risk Management?

    Risk management is the process of assessing, managing and also mitigating losses. For investors, risk management is where an investor assesses the potential for loss in an investment, or portfolio ...
  3. Investing

    Opportunity Cost

    Every action has a cost, even the ones you don't pursue. Find out how this is calculated.
  4. Economics

    What Is Opportunity Cost And Why Does It Matter?

    Economists suggest that the "opportunity cost" of any decision, the value of the next-best alternative, is crucial to making sound choices.
  5. Professionals

    Commuters' University: On-The-Road Learning

    Effectively using your commute time could place you miles ahead of your competition.
  6. Economics

    The Uncertainty Of Economics: Exploring The Dismal Science

    Learning about the study of economics can help you understand why you face contradictions in the market.
  7. Personal Finance

    The Role Of Opportunity Cost In Financial Decision Making

    Opportunity cost is an essential, often overlooked aspect of financial decision making.
  8. Professionals

    Is Your High-Profile Job Worth The Price?

    Certain careers can be prestigious and lucrative, but there are always costs. Find out if they're worth it.
  9. Economics

    A Practical Look At Microeconomics

    Learn how individual decision-making turns the gears of our economy.
  10. Forex Education

    8 Simple Investing Ratios You Need To Know

    Investing is a complex and often daunting experience, these equations are actually quite simple.

You May Also Like

Hot Definitions
  1. Commodity

    1. A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often ...
  2. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  3. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  4. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  5. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  6. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
Trading Center