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7 Examples of Opportunity Costs

 , December 22, 2016
An opportunity cost is the value of the best alternative to a decision. Decisions typically involve constraints such as time, resources, rules, social norms and physical realities. Doing one thing often means that you can't do something else. Opportunity cost is the practice of calculating or considering what you can't do as the result of each possible decision. The following are illustrative examples.

Risk vs Reward

An investor decides that the market is overvalued and goes completely to cash. This dramatically reduces their risk at the opportunity cost of the potential returns of being invested.

Education vs Work

A student considers the cost of a four year university education by calculating total tuition and expenses for the period. They may also include the opportunity cost of missing four years of salary in their calculations.

Product vs Product

A factory can produce 12,000 jars of peanut butter a day. The opportunity cost of every jar of smooth peanut butter is one jar of chunky peanut butter.

Service vs Service

A small airline has 28 aircraft. Their opportunity cost of offering a Tokyo to Hong Kong flight is the ability to offer a Tokyo to Taiwan flight.

Salary vs Quality of Life

An IT worker is offered a new job with a higher salary in a city with a lower quality of life. The opportunity cost of the higher salary is a lower quality of life such as reduced air quality.

Cost vs Quality

A manufacturer of headphones is facing stiff competition from low cost products with similar designs to their own. They decide to increase quality of their build to make the competition look and feel comparatively cheap. The opportunity cost of the new product design is increased cost and inability to compete on price.

Abilities vs Abilities

The opportunity cost of after school violin lessons at a particular school is the ability to join other after school activities such as baseball or the chess club.
Overview: Opportunity Cost
TypeDecision Making
Business Strategy
Management Accounting
DefinitionThe value of the best alternative to a decision.
Related ConceptsDecision Making
Business Strategy
Management Accounting
Quality of Life

Decision Making

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