What is Opportunity Cost?
Opportunity cost is the value of the next-best alternative you give up when making a choice — a fundamental concept in economics, business and everyday decisions.
Opportunity cost is the value of what you sacrifice by choosing one option over another. If you study, the opportunity cost is the money you'd earn working instead.
- •4 hours invested
- •Better test grade
- •Career knowledge
- •$80 earned
- •Experience gained
- •Time rested
Step-by-step worked examples
You can work and earn $20/hour or study for 4 hours. What is your opportunity cost of studying?
Hours spent studying = 4 hours Wage per hour = $20/hour Opportunity cost = 4 × $20 = $80
A farmer has land for 100 acres. She can grow wheat (profit $500/acre) or corn (profit $400/acre). If she chooses wheat, what is the opportunity cost per acre?
Profit per acre (corn) = $400 Profit per acre (wheat) = $500 Opportunity cost = $400 (corn profit foregone)
You have $5000. You can invest in stock (expected return $500) or bonds (expected return $250). If you pick bonds, what is your opportunity cost?
Return from stock = $500 Return from bonds = $250 Opportunity cost = $500 (stock return forgone)
Flashcards
Quick quiz
Q1.You give up 3 hours of sleep to attend a party. If sleep is worth 8 points per hour to you, your opportunity cost is:
Q2.Which is NOT an opportunity cost of attending a 2-hour movie?
Q3.A country chooses to build a hospital instead of a school. The opportunity cost is:
Q4.When is opportunity cost zero?
The full card deck, worked steps and AI-tutor support for “What is Opportunity Cost?” are in Notek — study by hand before your exam.
Common mistakes
Thinking opportunity cost is just the price paid. — Correct: Price is what you pay; opportunity cost is what you give up. They are different.
Assuming the best option has no opportunity cost. — Correct: Even the best option sacrifices other alternatives.
Only counting money as opportunity cost. — Correct: Time, happiness, health, and other values count too.
Believing opportunity cost doesn't apply to decisions at school. — Correct: Every student faces opportunity cost: studying vs. playing, morning class vs. sleep.
FAQ
What is opportunity cost?
Opportunity cost is the value of the best alternative you give up when you make a choice. Every decision involves sacrifice.
How do you find opportunity cost?
List all your options, rank them by value, and subtract your chosen option's value from the second-best option's value.
Why is opportunity cost called an 'economic' concept?
Because it explains why resources are scarce and why every choice has a trade-off. Economists use it to understand all decisions.
What is an everyday example of opportunity cost?
Spending $50 on a video game means you can't spend it on dinner or save it. The opportunity cost is the food or savings you skip.