Opportunity cost is what you would have gained by making the next-best choice.
Opportunity cost is a key concept in economics because it helps describe how people make choices between good but mutually exclusive options when they have scarce resources. It measures or describes the difference between the benefits of what you chose and what you lose by not having chosen a different option.
In the case of opportunity cost, "resources" and "value" go far beyond money to include time, pleasure, and anything else that is both scarce and significant to the person choosing and to the community affected by the choice.
So, for example, if you want to watch two different movies in the theater, the opportunity cost of watching one would be the enjoyment you would get from watching the other. The opportunity cost of earning a graduate degree might be the money you didn't earn during the time you were in school. The opportunity cost to a city of building a stadium might be the lack of funds to renovate the community center. The opportunity cost of investing in a given stock might be the guaranteed interest and limited risk in Treasury bills.
Recent Mentions on Fool.com
- Yes, You Can Retire With the Help of Oil and Natural Gas
- Using the Internet of Things and Cloud Connectivity to Build a Smarter Hospital
- 5 Can't-Miss Ways to Spot Financial Fraud
- Baidu Can Capitalize on China's E-Commerce Growth Without Selling a Thing to Consumers
- A Big Quarter for Big Lots? Take a Closer Look
- Qualcomm's Ironic 8-Core Adventure