What Is an Opportunity Cost?
Opportunity Cost is the rate of return that could have been earned on the best alternative investment. In general, it is the promised gain or return on the next best investment opportunity or the next best use of resources, which is foregone by putting the resources to a different investment instead.
This is the foregone income that is lost because idle funds had not been invested in earning certain assets; also, the yield available on the next best alternative use of the bank funds.
It is the amount of interest (expected return) sacrificed or opportunity lost by choosing the present investment option generating interests.
Major Characteristics of Opportunity Cost
Not all other opportunities are referred to as opportunity costs. The two vital characteristics determine which would qualify and which would not -
- Missed opportunity (the promising investment opportunity that has been lost)
- The one with the highest value (the lost opportunity for investment that would possibly have paid the highest)
Types of Opportunity Cost
There are two main kinds of above cost and they are -
- Explicit Cost
- Implicit Cost
Example
For example, choosing one high-paying job on another, investing in someone’s dream car instead of going on a prolonged vacation, doing an underpaying job with better office facilities while opting out of a high-paying one with inadequate employee benefits etc.
Use of the Term in Sentences
- Opportunity cost is the cost of choosing to use resources for one purpose while sacrificing the next-best alternative for the use of those resources.