Opportunity Costs

An Opportunity Cost is a type of implicit cost. “Opportunity cost” is an economics term, and opportunity cost is considered an economic cost. It is the contribution to income that is lost by not using a limited resource in its best alternative use. Opportunity cost includes the contribution that would have been earned if the alternative decision had been made less any administrative expenditures that would have been made for the other available alternative but that will not be made.

Anytime money is invested or used to purchase something, the potential return from the next best use of that money is lost. Often, the lost return is interest income. If money were not used to purchase inventory, for example, it could be deposited in a bank and could earn interest. The lost interest can be calculated only for the period during which the cash flows are different between the two options.