opportunity cost

Opportunity cost refers to the value of the most valuable alternative that is given up when making a choice. In other words, since resources (time, money, etc.) are limited, if you choose one option, you cannot choose another, and the best alternative given up at that time is the opportunity cost.

 

• Highest value among the alternatives given up: The opportunity cost is the highest value among the alternatives not chosen

 

• Applies to all resources: time, money, labor, etc.: Opportunity costs always arise when deciding where to spend limited resources, such as time, money, and labor.

 

• Explicit and implicit costs: These include not only the actual costs spent, but also the invisible opportunities (implicit costs).

 

• You can work part-time on the weekend (3 hours, 30,000 won), but if you go to see a movie, not only the cost of watching the movie but also the 30,000 won that you could have earned from the part-time job is an opportunity cost.

 

• If you can earn 8% interest by investing 100 million won in stocks and 5% interest by depositing it in a bank, the opportunity cost is the bank interest (5%) given up when choosing stocks.

 

Every choice involves giving up something, and the most valuable of these is opportunity cost. In order to make a rational choice, you must always consider opportunity cost.