Definition of Opportunity Cost

What is "opportunity cost"? What is the definition of "opportunity cost"? What does "opportunity cost" mean?

If you took any type of business classes in high school or college, then it is almost certain that you ran across the term "opportunity cost".

The basic definition of "opportunity cost" is this:

"... the value of the next-best choice available to someone who has picked between several mutually exclusive choices."

Source: Wikipedia - Opportunity Cost

Let's look at a few examples here:

Example #1: A businessman decides to open a 7-11 on a piece of land that he owns, instead of a bar.

The opportunity cost of opening up the 7-11 is the money that he could have made opening up the bar.

Example #2: A kid can either buy a new bike or an Xbox 360 gaming system. He chooses to buy the Xbox 360, so the opportunity cost of buying the 360 is the bike.

Example #3: A family has to choose between taking a trip to Florida or purchasing new skis for everyone in the family.

The opportunity cost of taking the trip to Florida is the new set of skis, while the opportunity cost of buying the new skis is the trip to Florida.

Example #4: A college student has to decide between studying for their chemistry final or enjoying a night out with his friends.

The opportunity cost of studying for the final is foregoing a night with his friends, while the opportunity cost of going out with his friends is the benefits of studying for his final.

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