Opportunity Cost

Opportunity Cost is putting a price on two or more decisions to evaluate which would be more efficient and weigh the pros and cons. Opportunity cost assumes we have limited resources, such as time and money.

A typical example of opportunity cost is:

Option 1:   A full-time summer job that earns $500 in total.

Option 2:   Investing $2,000 in the bank at 10%.”

“If I invest $2,000 at 10% for 4 months, the opportunity of that decision will be $300.” (10% of 2,000 = $200 less the potential $500.)
“If I work a full-time summer job for $500, I take advantage of a $300 gain (in economics)

You can probably imagine how this can become complex easily, as you notice the exponential growth of investing at 10%. Opportunity cost does not have to be financial. The point of opportunity cost is to make the most efficient decision.

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