Month End Glossary

Opportunity Cost

Opportunity cost is the value of the next best alternative foregone when a decision is made. It highlights the trade-offs inherent in resource allocation.

Opportunity cost refers to the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. It represents the value of the next best option that is not chosen. For instance, if a company decides to invest its funds in one project, the opportunity cost is the profit it could have made had it invested in a different project. This concept stresses the importance of analyzing decisions and understanding what is sacrificed to pursue a particular choice. In practical terms, opportunity cost can influence various business strategies, from budgeting and project evaluation to resource allocation. For example, if you spend your evening preparing for an exam instead of working on a job that pays $50 an hour, your opportunity cost is the $50 you forfeited. Therefore, understanding opportunity cost can help in making more informed and strategic decisions.

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