Opportunity Cost
BeginnerOpportunity cost is the value of the best alternative you give up when you make a choice. Every decision to use time or money one way means not using it another way.
Resources such as money, time and effort are limited, so choosing one option always means giving something up. The opportunity cost is the benefit of the best option you did not choose, not the sum of every alternative.
Suppose you have 5,000. You could spend it on a holiday, or invest it and expect it to earn about 6% a year. If you take the holiday, the opportunity cost is not only the 5,000 itself but also the roughly 300 a year it might have earned, and the growth that would have built on top of that over time.
Opportunity cost applies to time too. If you spend a Saturday doing your own home repairs instead of working an extra shift that pays 150, the opportunity cost of doing it yourself is the 150 you could have earned.
Businesses use the same idea. Money tied up in unsold inventory could have been used for marketing or to pay down debt. Thinking in terms of opportunity cost helps people and companies compare options fairly instead of looking only at the price tag.
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