Wednesday, May 22, 2013

Opportunity Cost

Opportunity Cost is the cost of an alternative good or service that must be forgone because of a certain action. In other words Opportunity Cost of a resource is the next highest valued alternative use of that resource. For example if you chose to go out and see a movie your opportunity cost would be the time that you could have saved if you did not see that movie. Another example is the opportunity cost of going to college, if you did not go to college you would have saved money if you had worked instead. There are opportunity costs with every transaction because since goods and services are scarce something must be forgone while you are making a purchase.

Opportunity Cost plays a large part in choosing what investment to pick. If you invest in a stock that gives you a 2% return over the year. You chose to invest in that stock over another investment. If a stock you didn’t choose gave a return of 8% your opportunity cost would be 6% (8%-2%).



No comments:

Post a Comment