Opportunity cost is an important concept in economics and finance, representing the cost incurred by choosing one valuable option over another when making an economic decision.
Simply put, if you choose opportunity A, you have to give up opportunity B, and the loss incurred by foregoing B is the opportunity cost.
Let’s take an example:
For instance, let’s say Jack has $10,000 in disposable income and is considering whether to invest it in the share market or deposit it in a bank for interest.
If he chooses to invest in the share market, he is forgoing the interest income from the bank deposit. If he chooses the bank deposit, he is giving up the potential returns he could have earned in the share market. This represents the opportunity cost of Jack’s decision.
In everyday life, opportunity cost also arises in various routine decisions. For instance, you are deciding whether to go to the movies or go to the gym. If you choose to go to the movies, you are foregoing the opportunity to exercise and improve your health and fitness.
Similarly, in business, when deciding whether to purchase new equipment, choosing to buy the new equipment means giving up the opportunity cost of other investment projects, such as expanding market share or improving employee benefits.
In the financial field, opportunity cost is often used to assess investment decisions. When investors are making decisions among multiple investment options, they need to consider the opportunity cost of giving up other investment alternatives. Therefore, investors have to make choices among different investment options.
By fully considering opportunity costs, they can make wiser decisions and maximize investment returns.
