Definition
Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen). In other words, it is the sacrifice of the second best choice available to someone, or group, who has picked among several mutually exclusive choices. .
Alternative choices
Choosing one alternative means another is foregone.
Economic Concept
Opportunity cost is a key concept in economics; it relates the scarcity of resources to the mutually exclusive nature of choice. The notion of opportunity cost plays a crucial role in ensuring that scarce resources are allocated efficiently. Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility are also considered implicit. or opportunity, costs. In the context of cash flow analysis, opportunity cost can be thought of as a cash flow that could be generated from assets the organization already owns, if they are not used for the project in question. There is always a trade-off between making decisions on the allocation of assets.
Assessing Opportunity Cost
Opportunity cost is assessed not only in monetary or material terms, but also in terms of anything which is of value to the decision maker. For example, a person who desires to watch each of two television programs being broadcast simultaneously, and cannot record one, can only watch one of the desired programs. Therefore, the opportunity cost of watching an NFL football game could be not enjoying the college football game, or vice versa.
Examples
In a restaurant situation, the opportunity cost of eating steak could be trying the salmon. The opportunity cost of ordering both meals could be twofold: the extra $20 to buy the second meal, and reputation with peers, as the diner may be thought of as greedy or extravagant for ordering two meals. A family might decide to use a short period of vacation time to visit Disneyland rather than doing household improvement work. The opportunity cost of having happier children could therefore be a remodeled bathroom.
In a job situation, a person could either choose to run their own bakery, or work as an employee for a restaurant. There are explicit costs on the line, such as the capital necessary to start a business, purchase of all the inputs, and so forth. However, there are possible implicit benefits, such as autonomy and freedom to be "your own boss", and implicit costs, such as the stress of running your own business. If the individual chooses to run their own bakery, their opportunity costs are the salary that the restaurant would have paid, and the smaller burden of responsibility as an employee instead of an owner.