# Opportunity Cost

Last Updated: April 28, 2024

## Opportunity Cost

When a company rents out a building and pays its rent, it will have to compare whether its rent is less than the implicit cost caused by the company’s situation. Implicit cost is a type of opportunity cost that refers to the opportunity cost of a company if it were to use its resources.

## What Is Opportunity Cost

The opportunity cost refers to the amount of positive and negative consequences missed when choosing one opportunity over the other. This concept is applied regardless of the impact and importance of the decision you have made.

## How to Calculate Opportunity Cost

Many important decisions have high impact opportunity costs that we have to consider whether this is done consciously or unconsciously. But the more effort in practicing and mastering the calculation of opportunity costs the easier it will be for us to discern the rewards and consequences entailed by our decisions. If you are still confused about the concept of opportunity cost then feel free to check and read up on the opportunity cost examples, samples, studies, and PDFs on the list above.

### 1.) List Down or Think About the Different Choices Presented

Begin by listing down or thinking about the various choices you can make. Go big, don’t be afraid to think outside of the box. Note that you should also include choices that you think are unconventional as these are still part of the possible choices you can make.

### 2.) Note the Effort Needed by a Choice

After you have done this, you will need to note the amount of effort you will put into it, when you have selected a choice. Doing this will allow you to easily compare and contrast the opportunity cost. As some choices will provide large amounts of rewards but will also require a large amount of effort to be put into it.

### 3.) List Down and Evaluate the Rewards and Consequences of the Choice

After you have thought about and noted the effort needed by the choice, you must list down all the possible outcomes that will stem from the chosen choice. This will include any positive and negative consequences that will arise.

### 4.) Repeat Until Finished

Repeat steps two to three until you have noted down all the effort and consequences the choice will entail. This will allow you to have a top-down perspective of the opportunity cost each choice will have and may help you make an informed decision.

## Why does opportunity cost exist?

Every choice we make in our everyday lives entails a specific type of cost. These costs are called opportunity cost which refers to the cost entailed by selecting a specific opportunity and forgoing the other. This exists due to the scarcity of opportunity or the concept that an opportunity will only be available at a specific moment in time and is sacrificed when the individual chooses an opportunity.

## How does opportunity cost affect our ability to make decisions?

Opportunity cost is a concept we grapple with in our everyday lives. An example of an everyday opportunity cost is the decision you will have when you are planning what you want to have for breakfast. Often, we can only choose one decision and forgo the other after giving some thought. The opportunity cost will allow us to gauge the potential foreseen rewards and consequences we will get when we pursue a specific choice. The higher the opportunity cost the more time you will have to spend thinking about which choice you will take. Note this does not account for the unforeseen rewards and consequences, as these are not taken into account in opportunity cost.

## Why is it important to know about the concept of opportunity cost?

The opportunity cost will allow us to grapple with the consequences and rewards we will experience and obtain when making a specific choice. If we understand the concept of opportunity cost, we can easily reason why we often think before we act on bigger choices. Not only that but knowing the concept of opportunity cost will also allow us to deliberately think about the opportunity cost being presented in a decision.

Opportunity cost is the concept that grapples with the sacrifices we make in our everyday choices, regardless of the impact of the rewards and consequences brought about by the opportunity. Knowing how to calculate opportunity costs will allow us to deliberately and consciously think about the important decisions we make. In conclusion, opportunity cost is a concept that we unconsciously grapple with in our everyday lives, which is something we should consciously practice.

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