opportunity cost

noun

Updated on: 1 May 2018

Definition of opportunity cost

: the added cost of using resources (as for production or speculative investment) that is the difference between the actual value resulting from such use and that of an alternative (such as another use of the same resources or an investment of equal risk but greater return)

Recent Examples of opportunity cost from the Web

Detractors often cite the opportunity cost of investing in a home.

— patrick sisson, Curbed, "To buy or to rent: The great homeownership debate," 20 Apr. 2018
Because average wages tend to rise, the opportunity cost of spending time with your children has grown.

— matthew yglesias, Vox, "Conservatives have no solution for the increasingly bleak economics of raising kids," 3 Apr. 2018
Tony Gibson, board member and former chairman of the Johnson’s Park Neighborhood Association, said the redevelopment of the Milwaukee Mall may be the opportunity cost for improving the area.

— morgan hughes, Milwaukee Journal Sentinel, "Milwaukee Mall's future is uncertain after developer buys former north side Sears," 13 Mar. 2018
Granted, there’s opportunity cost with any move, but the same is true with standing pat.

— david murphy, Philly.com, "Jake Arrieta's fastball not the only thing that's changed | David Murphy," 13 Mar. 2018
But the general trends are clear: return on investment is falling and certain therapeutic spaces are championed at the opportunity cost of others.

— sy mukherjee, Fortune, "The Diseases We Aren't Curing—And Why," 6 Feb. 2018
The opportunity cost of holding cash is pretty high.

— OregonLive.com, "PERS investment returns surged 15.3% in 2017, more than twice expectations," 1 Feb. 2018
That Are 500 Calories or Less Just be sure to factor in the opportunity cost of your debilitating hangover the next day.

— shay spence, PEOPLE.com, "Applebee's Is Serving $1 Bahama Mamas All Month Long," 1 Feb. 2018
By leaving millions of long-stay immigrants in the shadows, America is inflicting a vast opportunity cost on itself.

— The Economist, "LexingtonHostility to immigration used to be found in both parties," 18 Jan. 2018

These example sentences are selected automatically from various online news sources to reflect current usage of the word 'opportunity cost.' Views expressed in the examples do not represent the opinion of Merriam-Webster or its editors. Send us feedback.

First Known Use of opportunity cost

1894

in the meaning defined above

See Words from the same year

NEW! Time Traveler

Other Economics Terms

actuary, compound interest, globalization, indemnity, portfolio, rentier, stagflation, usurer

Financial Definition of OPPORTUNITY COST

opportunity cost

noun

What It Is

Opportunity cost refers to the value forgone in order to make one particular investment instead of another.

How It Works

For example, let's assume you have $15,000 that you could either invest in Company XYZ stock or put toward a graduate degree. You choose the stock. The opportunity cost in this situation is the increased lifetime earnings that may have resulted from getting the graduate degree -- that is, you choose to forgo the increase in earnings when you use the money to buy stock instead.

Here's another example. Let's say you have $15,000 and your choice is to either buy shares of Company XYZ or leave the money in a CD that earns only 5% per year. If the Company XYZ stock returns 10%, you've benefited from your decision because the alternative would have been less profitable. However, if Company XYZ returns 2% when you could have had 5% from the CD, then your opportunity cost is (5% - 2% = 3%).

Why It Matters

Opportunity cost is all about the most basic of economic concepts: trade-offs. It's a notion inherent in almost every decision of daily life and of investing: if you make a choice, you forgo the other options for now. And what's been given up can sometimes turn out to have been the wiser choice, which is why opportunity cost is best measured in hindsight -- after all, it is impossible to know the end outcome of any investment.

Opportunity costs are a factor not only in consumer decisions, but in production decisions, capital allocation, time management, and lifestyle choices.

Source: Investing Answers

Law Dictionary