What is Opportunity Cost?
Opportunity cost is a concept in Economics that is defined as those values or benefits that are lost by a business, business owners or organisations when they choose one option or an alternative option over another option, in the course of making business decisions.
Opportunity cost is referred to as a potential benefit that an individual, business organisation or investor misses out when choosing an alternative option over another. The objective of opportunity cost is to ensure that scant resources are efficiently used.
The chances of overlooking opportunity cost is very high as it cannot be seen. Therefore, it is essential that businesses should understand the potential of missed opportunities so that it can be used in making better decisions.
Calculating Opportunity Cost
Opportunity cost formula can be represented in the following way:
Opportunity cost = Return on best option not chosen – Return on option chosen
Or Opportunity cost can be said as
Opportunity cost = What you are sacrificing / What are you gaining
Opportunity cost is not always measured in terms of money, it can be calculated based on other factors such as time and satisfaction etc.
This concludes the topic on the Opportunity cost formula, which is a very important concept for calculating the opportunity cost in a business. To read more of such interesting concepts on Economics for Commerce Students, stay tuned to BYJU’S.