Opportunity cost definition of alternative cost with opportunity cost example calculation

Opportunity costs definition, example & simply explained

The concept of opportunity cost comes up again and again in the world of business studies and is far more intriguing than you might initially think.

If you understand and internalize opportunity costs, you can use this concept to make more intelligent decisions in everyday life or, for example, in investments. In this article, we therefore briefly and factually go into the opportunity cost definition or show how to calculate opportunity costs.

You can find all the information about the opportunity cost calculator at the bottom of the post.

Table of contents

Opportunity costs Definition

The opportunity cost definition can be simplified as follows: Opportunity costs represent the foregone benefit of an alternative course of action not chosen.

Confusing? Wikipedia shows a slightly longer Opportunity costs Definition: Opportunity costs are "... not real Costs according to Cost accountingbut put lost profits or lost Benefit which was used in the Decision for one of several alternatives in comparison to the best alternative is completely absent or only reduced".

More confused? Let's look at a couple of opportunity cost examples. Example 1 is about whether you should exercise after a long day at work in front of your laptop, or whether you should still work overtime? (In parentheses you will find the opportunity cost of the decision).

Opportunity cost simply explained vs. sunkcost

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Opportunity Cost Example: To invest or not to invest?

The above opportunity cost example shows quite clearly where the alternative costs of the respective decision lie. By the way, the opposite of opportunity costs are the so-called opportunity revenues.

Before we calculate the opportunity cost, let's look at another opportunity cost example. This time, the question is whether to afford luxury goods directly vs. whether to invest your money first and afford luxury goods later. In black you see the opportunity revenue:

Calculate opportunity costs with example

Calculate opportunity costs

The above examples were general. So let's clarify the question of how opportunity costs can be calculated.

In order to be able to calculate the opportunity costs, we choose in the example a decision regarding further education. The person asks himself whether it is worthwhile to study in his position, at his age, purely from a monetary point of view or not. 

Opportunity costs definition & simply explained 2

If we calculate the opportunity costs in this case, we get CHF 1'150'000 once and CHF 1'140'000 once, so the difference is CHF 10'000.

Now, of course, there are other factors in the question of opportunity costs than just the monetary ones. But if we narrow it down to this, the opportunity costs are minus CHF 10,000 if the person decides against the study and the opportunity revenues are plus CHF 10,000 if he decides for the study. 

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Conclusion on opportunity cost definition & calculation

Anyone who has internalized opportunity costs can make decisions more easily in everyday life and estimate the alternative costs or revenues. Especially with regard to long-term goals (whether financial investments or social relationships), this makes it easier to proceed in everyday life. If you receive an offer for a very lucrative job that leaves you no room for family and leisure time, you can now clearly weigh up what makes sense for you.

Furthermore, you should definitely know the difference between opportunity cost and sunk cost. If you have not yet read the article, you will find here the Sunk Cost Contribution.

How did you like our post on opportunity costs? Do you have a desired topic you'd like us to address in the future? Feel free to leave us a comment

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