By Puja Shah. Edited by Arjun Chandrasekar.
Often overlooked, but crucial to use when making decisions, this article will introduce you to opportunity cost so that you can incorporate it into your decision-making and see how it is used in business and the world.
Definition & Applications
Opportunity cost is weighing the costs and benefits that are seen and hidden in any option. It is important to recognize it so that you can understand your missed opportunities and learn and improve in the future when making decisions. It is used to be well informed before making decisions since it is used to weigh out the pros and cons and costs and benefits by businesses and individuals.
It can be calculated by subtracting the return on the chosen option from the return on the best option that wasn’t chosen to know what you missed out on or gained.
Opportunity cost can be used for returns on investments, returns that businesses get, and comparing investment options. It is different from sunk cost in that sunk cost is the disparity in the money put into an option in the past and what the returns and benefits missed out in the future are after having chosen another option; it is a cost of a past opportunity that can’t be taken back.
Opportunity cost has many real-life applications, too. One example is when eating lunch out. The opportunity cost is having saved less money for a future vacation that you were saving for. Another example is studying for a test all night long the night before. The opportunity cost is not sleeping well the night before the test and feeling tired when taking it.
As you can see, opportunity cost is important in decision making and it is important to weigh out all your options and consequences before making a choice. If you found this article informative, be sure to like and comment!