Opportunity cost expresses the expense of a chosen option among other alternatives in contrast to enjoying the benefit of the other possible choices. The ‘cost’ is the difference in one reward versus another. The opportunity cost is the reward that is not received due to not choosing the other better option. If the second best option is not as good as the option chosen there is no opportunity cost.
In economics, opportunity cost is defined by the relationship between scarcity and choice and tries to make sure that limited resources are used as efficiently as possible among all the possible choices.
Opportunity costs are not only measured in financial terms, there is also the cost of future growth based on a current decision, the cost of time, and the cost of energy and effort.
Opportunity cost is the difference in the expense of a current decision for action in comparison to the second best alternative of an investment, trade, product, employee, business, person, or service.
Examples:
The opportunity cost of capital in a specific stock that could be in a different stock creating bigger returns.
The opportunity cost of capital in cash that could be in different assets creating returns.
The opportunity cost of your time put into your job that could be used to create your own business.
The opportunity cost of location by buying a house instead of staying free to live where ever you want at any time.
The opportunity cost of marriage versus being single and able to date anyone you want.
After a decision is made on how to allocate limited resources the opportunity cost is set by the removal of the other options. If there is no removal of other options after a decision, then there is no opportunity cost. Opportunity costs can only be measured after other options are removed as possibilities in the time frame of the resource allocation.
