What is “opportunity cost”? Although it may sound confusing, opportunity cost can be explained through a struggle almost all highschoolers go through. The struggle of deciding between staying home to study for an upcoming test or going out with friends. Whether you chose to study or party, you miss out on something just by choosing. This is called opportunity cost.
Opportunity cost is the loss of a potential gain you could have benefited from, when one alternative is chosen over others. Simply put it is the value of the second best option or decision that was not chosen. Considering the studying vs. going out problem, the opportunity cost would be in terms of the potential benefit you lose. In case one, when you choose to study for the test, the benefits you gain are being better prepared, reduced chances of having to cram, and lowering stress because you did not procrastinate. However, the opportunity cost of this choice – or the benefit you lose by choosing the former – is the experience and time spent out with your friends. In case two, when you go out and choose the latter option, the reverse is also true. Fun experience is gained, however the opportunity cost is the revision time which may affect your test results.
The concept of opportunity cost applies to both explicit and implicit costs. Explicit costs would involve money spent on a purchase, while implicit costs – relating to the previously mentioned scenario – would involve non-monetary sacrifices such as time, experience or even rest.
To restate, opportunity cost is the value of the direct alternative chosen over the original option or in other words the possible benefit that you sacrifice when choosing one thing over another.
Recognizing the opportunity cost as beyond an economic concept alone can also help with making smart decisions in daily life, such as spending on something you aren’t sure if you need or saving up for the future. Every choice has a cost whether explicit or implicit and opportunity cost can help you see that.