Opportunity Cost

Opportunity cost

Opportunity cost is the cost of forgoing another alternative that has not been selected but could be. It represent the value of another alternative that forgone while taking decision. The opportunity cost may more or less depend upon the alternative. For instance many of the economies strive to select an alternative whose opportunity cost is less.

Examples

Time-Related Opportunity Cost

You are spending time watching movies in the theater instead of spending time in other important activities such as study or work. In this situation, the opportunity cost of watching a movie is losing the result of the activity you forgave. If you have having opportunity to study for better performance in the examination then you lose that opportunity due to spending time watching movies. Losing a better performance in the examination is the opportunity cost of watching a movie in the theater.

Money Related opportunity cost

When an organization ABC offers you a salary of 1 lakh dollars per year and another organization XYZ offers 90,000 dollars per year. If you choose the job of organization XYZ then the Opportunity cost of selecting this job is $10,000. That means you lose the opportunity to select the first alternative. If you could have selected the first alternative you would have earned $10,000 more. This is the opportunity cost of current alternatives.

Profit-related opportunities cost

If an organization launches product A instead of launching product b then the opportunity cost of selecting product A is losing the opportunity that could have been earned by launching product B. That means if you have selected to launch product A in the market you need to face or lose the opportunity that you could have gotten by launching product B in the market.

Investment related Opportunity cost

Many investors while investing in the stock market may invest in stock for better returns. Many times all the investors experienced that they could have earned more than what they had earned by investing in XYZ stock. Assume Nagesh has invested in the stock of Tata Motor instead of investing in VBL. If the stock of VBL gives more written than the stock of Tata Motor then the opportunity cost of selecting the stock of Tata Motor is what could have been earned if the investment would have been in the stock of VBL.

Use of land

Land used for home or commercial use. If an individual used the piece of land for residential purposes instead of commercial purposes, its opportunity cost is the return that could have been earned if the land was used for commercial purposes.

Personal financial management

Many people invest their savings in the stock market or in land to get better returns instead of spending on tours or purchasing costly products. the opportunity cost for spending savings on a tour is the return that could have been earned by investing in stock or land.