Dictionary - Opportunity Cost

Definition

The value of the next best alternative that has been given up in order to get something. The foregone benefits one could have received by taking an alternative decision.

Example

Suppose you have 20$ in your piggy bank. You can either spend that money on a new t-shirt or buy your favorite band's new album. If you chose to buy a new t-shirt, your opportunity cost would be the value you forgo by not being able to buy and listen to the new album.

Relevance

Opportunity costs are one of the most basic and omnipresent principles in economics. Every time we take a decision, we face trade-offs and thus opportunity costs. It is important to be aware of the fact that choosing something also always means not choosing something else.

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