What is Opportunity Cost?
Opportunity cost refers to the potential benefits that are foregone as a result of making a particular choice or decision. It is the cost of an alternative that must be given up in order to pursue a certain action.
For example, consider a person who has $100 and must decide between buying a new shirt or saving the money in a bank account. The opportunity cost of buying the shirt is the potential return that could have been earned by saving the money in the bank account. If the person chooses to buy the shirt, they will not be able to earn any interest on the money that was used to purchase the shirt.
Opportunity cost is an important concept in economics because it helps to illustrate the trade-offs that people and organizations must make when making decisions. It is important to consider opportunity cost when making decisions because it helps to ensure that resources are being used in the most efficient and effective way possible.
Opportunity cost is a subjective concept because it depends on an individual's or organization's priorities and preferences. For example, one person might consider the opportunity cost of buying a new shirt to be the potential return that could have been earned by saving the money in the bank account, while another person might consider the opportunity cost to be the enjoyment and utility that they would have derived from wearing the shirt.
Overall, opportunity cost is a key concept in economics that helps to understand the trade-offs and costs associated with different choices and decisions.