What is Opportunity Cost?

Opportunity Cost

Opportunity cost, plainly stated, is the cost of not doing something else. Whenever we purchase one good or service, we’re also deciding not to buy a range of other goods and services.

Take, for example, if I were to purchase a $10 haircut. Because I’m buying a $10 haircut, I cannot use those same ten dollars to buy pizza, a pair of socks, or a basketball. Opportunity cost is defined as “the cost of not doing the next best alternative”. In this case, the thing I would most like besides a haircut is pizza. The opportunity cost of buying a $10 haircut is that I cannot buy pizza.

Opportunity cost also relates to how we spend our time. Again, whenever we spend time doing one thing, we’re also deciding not to spend our time doing other things. Say I decide to be a waiter. I could not be employed at other companies as well. If I were a waiter, I could not also work at the grocery store, or mow lawns, or rake leaves. Because I’m not a waiter, the next best option for me would be to rake leaves. Because I’m not a waiter, I cannot rake leaves. The opportunity cost of being a waiter is that I cannot rake leaves.

Opportunity cost is often discussed both in and outside of economics. Businesses try to limit their opportunity costs by always making the best decision.

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by Mometrix Test Preparation | Last Updated: August 14, 2019