Opportunity Cost
What Does Opportunity Cost Mean?
Opportunity cost is the value lost when a person chooses one option over another. In finance, this term recognizes that every major business decision involves a financial trade-off, even if the decision ultimately leads to a greater gain when considering all factors.
Insuranceopedia Explains Opportunity Cost
When a person wants to make money from a property they own, they have two primary options: sell it or lease it. If they decide to sell, the potential income they could have earned from leasing represents the opportunity cost of that decision. Similarly, if they choose to lease the property, the potential profit from selling it becomes the opportunity cost.
Although opportunity cost is an economic term, it is frequently used in other contexts as well. For example, when someone decides to pursue a college degree, the wages and work experience they forgo during their education are the opportunity costs of that decision.
