Opportunity Costs

Definition

Opportunity costs refer to the value of the next best alternative that is forgone when making a choice. It represents the benefits or profits that could have been gained from an alternative option.

Analogy

Imagine you have $20 and you can either buy a new video game or go to a movie with your friends. If you choose to buy the video game, your opportunity cost would be the fun and experience you could have had at the movie.

Related terms

Trade-offs: Trade-offs are choices made between different options due to limited resources. For example, choosing to study for an exam instead of going out with friends is a trade-off.

Sunk Costs: Sunk costs are expenses that have already been incurred and cannot be recovered. They should not be considered when making future decisions.

Comparative Advantage: Comparative advantage refers to the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost compared to others.