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 Commentary
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.
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opportunity cost
- The best alternative that is forgone because a particular course of action is pursued. An example is the interest income that is given up when large balances are kept in a checking account. Likewise, purchasing a home means that less money is available for another investment.
Copyright © 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company.
Main Entry: op·por·tu·ni·ty cost
Function: noun
: the cost of making an investment that is the difference between the return on one investment and the return on an alternative
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