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Opportunity cost

Definition

Opportunity cost refers to the value of the next best alternative that must be forgone when making a choice between two or more options. It represents what you give up in order to choose something else.

Analogy

Imagine you have $10 and you can either buy a movie ticket or go out for ice cream with your friends. If you choose to buy the movie ticket, your opportunity cost would be not being able to enjoy ice cream with your friends. In this case, your opportunity cost is represented by what you could have had but gave up for another option.

Related terms

Trade-off: A trade-off occurs when choosing one option requires sacrificing another option. It involves weighing different benefits against each other.

Marginal cost: Marginal cost refers to the additional cost incurred from producing or consuming one more unit of a good or service.

Sunk cost: Sunk costs are costs that have already been incurred and cannot be recovered. They should not be considered when making future decisions.