What is the opportunity cost?

The definition of opportunity cost is what we give up when making an economic decision, including the benefits that could have been achieved by choosing the alternative option. This term was a creation of Friedrich with Wieser in his Theory of the Social Economy in 1914.

The opportunity cost is, therefore, the different resources that are stopped entering or that imply a coste for the simple fact of not having selected the best possible option when there are a series of limited resources, such as time and money.

This concept is also known as the value of the best option not chosen.

How to calculate the opportunity cost?

To understand the concept of opportunity cost a little better, we are going to give an example. Imagine that we have 20 euros to go to a football game, but we also have other alternatives such as going for a walk or staying at home watching television. The opportunity cost will be the benefit that the alternative we have given up will bring us. The theory says that if we spend the 20 euros on football and while we are in the meeting we do not like it, the most advisable thing would be to leave, since although the amount invested is not recovered, at least you can take advantage of the time to go for a walk or watch tv in each.

For you to learn how to calculate opportunity cost, the best thing is that you know what the opportunity cost formula is. Follow the steps below carefully:

  • Find the unit of measure with which to analyze the opportunity cost. It is usually in euros.
  • Establish the precise expenses, costs and resources to make a decision. For example, going to the theater will cost 20 euros and it will take you to take the car and spend on transport.
  • Each alternative must be quantified in monetary terms, but you must also establish how much you would be willing to pay for each of them. For example, if a match for which you paid 20 euros you really like it, it could have a higher value.
  • To calculate the opportunity cost, the value of the best unrealized option must be subtracted from the value of the selected option. If you go to a football match for which you would pay 20 euros, you would save the 15 euros that, for example, a dinner would cost you. The opportunity cost in this case would be 5 euros.

It must be said that the opportunity cost does not mean that the alternative in which it leads you to invest a lesser amount of money should always be chosen.

Learn more about the opportunity cost

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