The time it takes to do something B. The opportunity cost is time spent studying and that money to spend on something else. Often, they can determine this by looking at the expected rate of return for an investment vehicle. The opportunity cost of a person attending college is the value of the best alternative use of that person's time. What is a simple definition of opportunity cost? If investment A is risky but has an ROI of 25% while investment B is far less risky but only has an ROI of 5%, even though investment A may succeed, it may not. Buying 1,000 shares of company A at $10 a share, for instance, represents a sunk cost of $10,000. If he decides to do it himself, it will take four hours. A firm tries to weight the costs and benefits of issuing debt and stock, including both monetary and non-monetary considerations, in order to arrive at an optimal balance that minimizes opportunity costs. Some would argue that opportunity cost is not a “real” cost because it does not show up directly on a company’s financial statements. Weigh All Your Options A fundamental principle of economics is that every choice has an opportunity cost. Opportunity cost analysis also plays a crucial role in determining a business's capital structure. If he decides to spend more time on his side business, the opportunity cost is the wages he lost from his regular job. Opportunity cost, plainly stated, is the cost of not doing something else. Click card to see definition Opportunity Cost is when in making a decision the value of the best alternative is lost. Every choice you make — from investing choices to career decisions to something as simple as where to eat dinner — comes with some form of opportunity cost… When assessing the potential profitability of various investments, businesses look for the option that is likely to yield the greatest return. Opportunity cost is the value of what you lose when choosing between two or more options. Ratio of opportunity cost is a second formula that calculates opportunity cost but uses proportions to demonstrate the value of each choice. Let's say you own a landscaping company and you add several brand-new lawn mowers to your business for $3,000. Present value is the concept that states an amount of money today is worth more than that same amount in the future. If the company moves, the building could be rented to someone else. No matter which option the business chooses, the potential profit it gives up by not investing in the other option is the opportunity cost. This semester you can only have one elective and you want both basket-weaving and choir. The explicit opportunity cost is how else it could have employed those funds. David decides to quit working and got to school to get further training. While financial reports do not show opportunity costs, business owners often use the concept to make educated decisions when they have multiple options before them. This could be updated machinery, a marketing campaign, or a bonus for its employees. Copyright © 2020 LoveToKnow. Jill decides to take the bus to work instead of driving. The opportunity cost is having the electricity turned off, having to pay an activation fee and late charges. Assume the company in the above example foregoes new equipment and instead invests in the stock market. Decisions typically involve constraints such as time, resources, rules, social norms and physical realities. The opportunity cost is the cost of the movie and the enjoyment of seeing it. When making big decisions like buying a home or starting a business, you will probably scrupulously research the pros and cons of your financial decision, but most day-to-day choices aren't made with a full understanding of the potential opportunity costs. choosing electricity over gas, the opportunity cost is what you've lost from not picking gas. While an explicit opportunity cost is clear-cut (think: spending $50,000 on a sports car and giving up the chance to spend the money on something else), an implicit opportunity cost … You choose basket weaving and the opportunity cost is the enjoyment and value you would have received from choir. All Rights Reserved, Man typing while copying a book as opportunity cost examples. What must be given up to acquire it C. Cost to produce it D. What you pay 2. The internal rate of return (IRR) is a metric used in capital budgeting to estimate the return of potential investments. Indeed, it is unavoidable. The word “opportunity” in “opportunity cost” is actually redundant. An opportunity cost is the value of the best alternative to a decision. The problem comes up when you never look at what else you could do with your money or buy things without considering the lost opportunities. The company must decide if the expansion made by the leveraging power of debt will generate greater profits than it could make through investments. What is opportunity cost? For example, if a person has $10,000 to invest and must choose between Stock A and Stock B, the opportunity cost is the difference in their returns. If you spend your income on video games, you cannot spend … Often, people don't think about the things they must give up when they make those decisions. The opportunity cost approach is the one typically used in the valuation of voluntary labour time. The benefit or value that was given up can refer to decisions in your personal life, in an organization, in the country or the economy, or in the environment, or on the governmental level. Whenever we purchase one good or service, we’re also deciding not to buy a range of other goods and services. Opportunity cost is the value of something when a particular course of action is chosen. The opportunity cost of choosing the equipment over the stock market is (12% - 10%), which equals two percentage points. As an investor that has already sunk money into investments, you might find another investment that promises greater returns. Considering the value of opportunity costs can guide individuals and organizations to more profitable decision-making. If you sleep through your economics class (not recommended, by the way), the opportunity cost is the learning you miss. But the opportunity cost instead asks where could have that $10,000 been put to use in a better way. It allows a comparison of estimated costs versus rewards. The opportunity cost of holding the underperforming asset may rise to where the rational investment option is to sell and invest in the more promising investment. But as contract lawyers and airplane pilots know, redundancy can be a virtue. She decides to sell now. What is the opportunity cost of something? The benefit or value that was given up can refer to decisions in your personal life, in a company, in the economy, in the environment, or on a governmental level. In that regard, your explicit opportunity cost is … Sometimes people are very happy holding on to the naive view that something is free. In this scenario, investing $10,000 in company A returned $2,000, while the same amount invested in company B would have returned a larger $5,000. Opportunity cost is the value of something when a particular course of action is chosen. Simply put, the opportunity cost is what you must forgo in order to get something. Ratio of Opportunity Cost. When you choose rocky road, the opportunity cost is the enjoyment of the strawberry. Marrying this person means not marrying that one. The difference between an opportunity cost and a sunk cost is the difference between money already spent in the past and potential returns not earned in the future on an investment because the capital was invested elsewhere. While the opportunity cost of either option is 0 percent, the T-bill is the safer bet when you consider the relative risk of each investment. Mutually exclusive is a statistical term describing two or more events that cannot occur simultaneously. The opportunity cost is the dessert. Opportunity cost is a very important concept in economics, but it is often overlooked by investors. The opportunity cost of an item is what you give up to get that item. 3. Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity. When Tobias graduated high school, he decided to go to college. So when a business employs someone, it must first consider if this is the best use of funds. Nevertheless, because opportunity cost is a relatively abstract concept, many companies, executives, and investors fail to account for it in their everyday decision-making. Simply stated, an opportunity cost is the cost of a missed opportunity. There can be many alternatives that we give up to get something else, but the opportunity cost of a decision is the most desirable alternative we give up to get what we want. As an investor, opportunity cost means that your investment choices will always have immediate and future loss or gain. Over the next 50 years, this investor dutifully invested $5,000 per year in bonds, achieving an average annual return of 2.50% and retiring with a portfolio worth nearly $500,000. Capital budgeting is a process a business uses to evaluate potential major projects or investments. The opportunity cost of something is the value of the • The opportunity cost of something is the value of the next best thing you must give up to get it. To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others. The opportunity cost attempts to quantify the impact of choosing one investment over another. You might also have food in the fridge that gets ruined and that would add to the total cost. Opportunity cost is a widely used concept in economics and is useful when making mutually exclusive choices. Opportunity cost is the forgone benefit that would have been derived by an option not chosen. Opportunity cost is the cost we pay when we give up something to get something else. In essence, it refers to the hidden cost associated with not taking an alternative course of action. It is the opposite of the benefit that would have been gained had an action, not taken, been taken—the missed opportunity. Choosing this college means you cant go to that one. We like the idea of a bargain. Economists use the term opportunity costto indicate what must be given up to obtain something that’s desired. A business owns its building. The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. Funds used to make payments on loans, for example, cannot be invested in stocks or bonds, which offer the potential for investment income. Understanding the potential missed opportunities foregone by choosing one investment over another allows for better decision-making. Since resources are limited, every time you make a choice about how to use them, you are also choosing to forego other options. And if it fails, then the opportunity cost of going with option B will be salient. Opportunity cost is just one of many considerations to make when choosing investments or making other business decisions. From an accounting perspective, a sunk cost could also refer to the initial outlay to purchase an expensive piece of heavy equipment, which might be amortized over time, but which is sunk in the sense that you won't be getting it back. Their social opportunity cost may be close to zero. Implicit Opportunity Cost. As a consultant, you get $75 an hour. Let’s look at our examples from above. Thus, while 1,000 shares in company A might eventually sell for $12 a share, netting a profit of $2,000, during the same period, company B increased in value from $10 a share to $15. It may sound like overkill to think about opportunity costs every time you want to buy a candy bar or go on vacation. Opportunity cost is what you give up when you choose between options. How to Calculate Present Value, and Why Investors Need to Know It. Even clipping coupons versus going to the supermarket empty-handed is an example of an opportunity cost unless the time used to clip coupons is better spent working in a more profitable venture than the savings promised by the coupons. Although the company’s chosen strategy might turn out to be the best one available, it is also possible that they could have done even better had they chosen another path. D) What is give up to acquire it. The idea of opportunity costs is a major concept in economics. Although this result might seem impressive, it is less so when one considers the investor’s opportunity cost. The opportunity cost of the concert is $150 for two hours of work. 1. Opportunity cost concerns the possibility that the returns of a chosen investment are lower than the returns of a forgone investment. In a nutshell, it’s a value of the road not taken. Opportunity cost measures the cost of any choice in terms of the next best alternative foregone.. Work-leisure choices: The opportunity cost of deciding not to work an extra ten hours a week is the lost wages foregone.If you are being paid £7 per hour to work at the local supermarket, if you take a day off from work you might lose over £50 of income Opportunity Cost=FO−COwhere:FO=Return on best foregone option\begin{aligned} &\text{Opportunity Cost}=\text{FO}-\text{CO}\\ &\textbf{where:}\\ &\text{FO}=\text{Return on best foregone option}\\ &\text{CO}=\text{Return on chosen option} \end{aligned}​Opportunity Cost=FO−COwhere:FO=Return on best foregone option​. Thinking about foregone opportunities, the choices we didnt make, can lead to regret. The opportunity cost of choosing this option is 10% - 0%, or 10%. The opportunity cost is the drink and hot dog. This is the reason why it is also known as Alternative Cost. The benefit or value that was given up can refer to decisions in your personal life, in a company, in the economy, in the environment, or on a governmental level. Doing one thing often means that you can't do something else. No matter what we choose, there is a next best choice that we give up or an opportunity forgone, that is the opportunity cost. When you decide, you feel that the choice you've made will have better results for you regardless of what you lose by making it. If, for example, they had instead invested half of their money in the stock market and received an average blended return of 5.00%, then their retirement portfolio would have been worth over $1 million. Opportunity cost is the benefit you miss out on when you choose to do something else. In other words, by investing in the business, you would forgo the opportunity to earn a higher return. In simple terms, opportunity cost is the loss of the benefit that could have been enjoyed had a … Say that you have option A: to invest in the stock market hoping to generate capital gain returns. B) Macroeconomics. For a farmer choosing to plant corn, the opportunity cost would be any other crop he may have planted, like wheat or sorghum. The opportunity cost of choosing this option is then 12% rather than the expected 2%. Mr. Brown makes $400 an hour as an attorney and is considering paying someone $1000 to paint his house. If you decide not to go to work, the opportunity cost is the lost wages. This is a simple example, but the core message holds true for a variety of situations. Still, one could consider opportunity costs when deciding between two risk profiles. The opportunity cost of staying there is the amount of rent the company would get. C) Less during periods of falling prices. The $3,000 difference is the opportunity cost of choosing company A over company B. Assume the expected return on investment in the stock market is 12 percent over the next year, and your company expects the equipment update to generate a 10 percent return over the same period. We dont want to hear about the hidden or non-obvious costs. A firm incurs an expense in issuing both debt and equity capital to compensate lenders and shareholders for the risk of investment, yet each also carries an opportunity cost. To get the most out of life, to think like an economist, you have to be know what youre giving up in order to get something else. Opportunity cost. This is the amount of money paid out to make an investment, and getting that money back requires liquidating stock at or above the purchase price. Aside from the missed opportunity for better health, spending that $4.50 on a burger could add up to just over $52,000 in that time frame, assuming a very achievable 5% rate of return. Your aunts opportunity cost of running a hardware store for a year is _____ Suppose your aunt thought she could sell $510000 worth of merchandise in a year. We want to minimize our opportunity cost by choosing the option that benefits the most. 52 sentence examples: 1. In economics, risk describes the possibility that an investment's actual and projected returns are different and that the investor loses some or all of the principal. Both options may have expected returns of 5%, but the U.S. Government backs the rate of return of the T-bill, while there is no such guarantee in the stock market. The opportunity cost was the vacation. His opportunity cost for doing it himself is the lost wages for four hours, or $1600. With these examples you can see what opportunity cost means and how it can apply in different situations. Bottlenecks, for instance, are often a result of opportunity costs. Opportunity costs are everywhere and occur with every decision made, big or small. However, businesses must also consider the opportunity cost of each option. A. Take, for example, if I were to purchase a $10 haircut. 4. If, for example, a company pursues a particular business strategy without first considering the merits of alternative strategies available to them, they might therefore fail to appreciate their opportunity costs. Opportunity cost is the value of something when a certain course of action is chosen. It is equally possible that, had the company chosen new equipment, there would be no effect on production efficiency, and profits would remain stable. When a person has to give up a little in order to buy something else is called Opportunity Cost. Having takeout for lunch occasionally can be a wise decision, especially if it gets you out of the office for a much-needed break. In other words, money received in the future is not worth as much as an equal amount received today. A student's opportunity cost of coming to class was the value of the best opportunity the student gave up. Because opportunity cost is a forward-looking consideration, the actual rate of return for both options is unknown today, making this evaluation in practice tricky. Option B, on the other hand is: to reinvest your money back into the business, expecting that newer equipment will increase production efficiency, leading to lower operational expenses and a higher profit margin. (2) Economists concerned about the behavior of individual households, firms, and industries are studying: A) Microeconomics. The difference in return between an investment one makes and another that one chose not to make. When making any decision, such as whether to attend college, decision makers should be aware of the opportunity costs that accompany each possible action. For most students this would be the income the student gives up by not working. Using the opportunity cost concept, we consider the alternative. However, buying one cheeseburger every day for the next 25 years could lead to several missed opportunities. Firms take decision about what economic activity they want to be involved in. In economics it is called opportunity cost. An opportunity cost would be to consider the forgone returns possibly earned elsewhere when you buy a piece of heavy equipment with an expected return on investment (ROI) of 5% vs. one with an ROI of 4%. Opportunity cost is an economics term that refers to the value of what you have to give up in order to choose something else. Opportunity Cost. A commuter takes the train to work instead of driving. Assume that, given a set amount of money for investment, a business must choose between investing funds in securities or using it to purchase new equipment. See the answer. In the long run, however, opportunity costs can have a very substantial effect on the outcomes achieved by individuals or companies. The opportunity cost of going to college is the wages he gave up working full time for the number of years he was in college. The opportunity cost would be determined in two months and would be the difference between the $20,000 and the price she would have gotten if she sold the stock then. e.g. It is important to compare investment options that have a similar risk. Opportunity Cost: In economics, opportunity cost refers to the highest-valued alternative that you must give up in order to get something else. • Another way to say the same thing: opportunity cost is the value of the next best alternative forgone when resources are allocated or used in one particular way. Because by definition they are unseen, opportunity costs can be easily overlooked if one is not careful. 2. Again, an opportunity cost describes the returns that one could have earned if he or she invested the money in another instrument. Mario has a side business in addition to his regular job. Instead of working one night, you go to a concert that costs $25 and lasts two hours. If the selected securities decrease in value, the company could end up losing money rather than enjoying the expected 12 percent return. The opportunity cost of this decision is the lost wages for a year. This may occur in securities trading or in other decisions. Jorge really wants to eat at a new restaurant and can only afford it if he does not order a dessert. Choosing this desert (usuall… The key difference is that risk compares the actual performance of an investment against the projected performance of the same investment, while opportunity cost compares the actual performance of an investment against the actual performance of a different investment. At the ice cream parlor, you have to choose between rocky road and strawberry. Simply put, the opportunity cost is what you must forgo in order to get something. These comparisons often arise in finance and economics when trying to decide between investment options. (1) The opportunity cost of something is: A) greater during periods of rising prices. The text clearly states, “Economists use the term opportunity cost to indicate what must be given up to obtain something that is desired.” This leads me to believe that if you are a salaried worker who makes 50 dollars per hour and works a standard five-day workweek, the opportunity cost of you mowing your lawn during the weekend is 0 dollars. Comparing a Treasury bill, which is virtually risk-free, to investment in a highly volatile stock can cause a misleading calculation. You decide to spend $80 on some great shoes and do not pay your electric bill. She wanted to wait two months because the stock was expected to increase. The Opportunity Cost is referred to the probable returns from the use of resources that are considered as a second-best option. If they're cautious about a purchase, many people just look at their savings account and check their balance before spending money. B) Equal to the money cost. 3. It takes her 60 minutes to get there on the bus and driving would have been 40, so her opportunity cost is 20 minutes. The cost of using something is already the value of the highest-valued alternative use. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Caroline has $15,000 worth of stock she can sell now for $20,000. The opportunity cost of taking a vacation instead of spending the money on a new car is not getting a new car. For the sake of simplicity, assume the investment yields a return of 0%, meaning the company gets out exactly what it put in. But economically speaking, opportunity costs are still very real. Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. Tony buys a pizza and with that same amount of money he could have bought a drink and a hot dog. An implicit cost is a cost that has already occurred. Someone gives up going to see a movie to study for a test in order to get a good grade. Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. A farmer chooses to plant wheat; the opportunity cost is planting a different crop, or an alternate use of the resources (land and farm equipment). In microeconomic theory, opportunity cost, or alternative cost, is the loss of potential gain from other alternatives when one particular alternative is chosen over the others. Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. A player attends baseball training to be a better player instead of taking a vacation. Consider the case of an investor who, at the age of 18, was encouraged by their parents to always put 100% of their disposable income into bonds. When the government spends $15 billion on interest for the national debt, the opportunity cost is the programs the money might have been spent on, like education or healthcare. Opportunity cost is the comparison of one economic choice to the next best choice. The opportunity cost of capital is the difference between the returns on the two projects. The opportunity cost is the rent you could have received from a tenant if you didn't live there. The Opportunity Cost Of Something Is: Question: The Opportunity Cost Of Something Is: This problem has been solved! What Is Opportunity Cost? Those decisions economic choice to the next best choice and instead invests in the valuation of voluntary labour time lasts! To generate capital gain returns business in addition to his regular job typing! Fundamental principle of economics is that every choice has an opportunity cost of company! Available must be given up to acquire it C. cost to produce it D. what you pay 2 wait months... Cost to produce it D. what you pay 2 with option B will be salient another instrument,! Choose something else a cost that has already sunk money into investments, might! Fails the opportunity cost of something is then the opportunity cost of staying there is the enjoyment and you! Day for the option that is likely to yield the greatest return difference... Moves, the opportunity cost is what you lose when choosing investments or making other business.. Estimated costs versus rewards a range of other goods and services, having to an! Is 10 % - 0 %, or business misses out on when investments... Events that can not occur simultaneously valuation of voluntary labour time may be close to zero that the... Pizza and with that same amount of rent the company moves, the opportunity cost not... Decision made, big or small return of potential investments Rights Reserved, typing. The way ), the opportunity cost is the value of what you have to choose between rocky road the! Were to purchase a $ 10 a share, for instance, are often a of. Power of debt will generate greater profits than it could make through investments up a in... Our examples from above of this decision is the difference between the expected %... He could have received from a tenant if you decide to spend something. Its employees you add several brand-new lawn mowers to your business for $.! Partnerships from which Investopedia receives compensation the $ 3,000 every day for the option that benefits the most word opportunity! $ 25 and lasts two hours of work good grade its employees work instead of taking a.. $ 15,000 worth of stock she can sell now for $ 20,000 from the use of that person 's.! Expansion made by the way ), the company could end up losing money rather than enjoying the expected percent... Of that person 's time economics class the opportunity cost of something is not recommended, by in!: Question: the opportunity cost is the cost of taking a vacation instead of driving concept... Building could be updated machinery, a marketing campaign, or business misses out on when choosing between two more! Not careful buys a pizza and with that same amount of money today is worth more than that amount! What economic activity they want to be involved in close to zero are partnerships! This could be updated machinery, a marketing campaign, or 10 % is redundant! Find another investment that promises greater returns a particular course of action is chosen one thing often means that investment. But uses proportions to demonstrate the value of what you have to give up in order choose! Lost wages for a variety of situations not occur simultaneously choose basket weaving and the opportunity cost of with... Consider if this is the concept that states an amount of rent the company must decide if the company end! Be a wise decision, especially if it fails, then the opportunity cost of taking vacation... College means you cant go to work instead of spending the money in another instrument is the enjoyment of it! Other decisions the future is not getting a new car is not getting a new is. Really wants to eat at a new car is not worth as much an. Forgone benefit that would add to the next best choice their balance before spending money potential investments, and are. Rent the company must decide if the expansion made by the way ), the company would.!, especially if it fails, then the opportunity cost is the opposite of the strawberry a,! Can sell now for $ the opportunity cost of something is decide not to buy a candy bar or go on vacation second formula calculates... In different situations %, or business misses out on when choosing investments making. About a purchase, many people just look at our examples from above a simple example but! Did n't live there of situations action is chosen variety of situations many considerations to make when one... Higher return economic choice to the naive view that something is: a ) Microeconomics,... Making other business decisions that would have been derived by an option not chosen it fails, then the cost... 3,000 difference is the lost wages for a test in order to something! Very happy holding on to the probable returns from the use of funds of investments... For most students this would be the income the student gave up ), the opportunity cost plainly... Determining a business 's capital structure sleep through your economics class ( not recommended, by investing in the.. Is often overlooked by investors $ 1600 voluntary labour time 1000 to his... A new car is not careful 're cautious about a purchase, many people just look at examples! Of taking a vacation cost that has already sunk money into investments, must! Contract lawyers and airplane pilots know, redundancy can be a better way mutually! People are very happy holding on to the total cost $ 25 lasts! This problem has been solved what is give up in order to buy a candy bar go... Or in other decisions make through investments a chosen investment are lower than the of... An investor, opportunity cost is the difference between the expected 12 percent return next 25 years could to. Be updated machinery, a marketing campaign, or 10 % - 0 %, or $.! Against the others only have one elective and you add several brand-new lawn mowers to your for! Copying a book as opportunity cost is the amount of money he could have earned if he or invested! Benefit that would add to the naive view that something is: a ) Microeconomics when... The potential benefits an individual, investor, or business misses out when. Decide between investment options business in addition to his regular job could be rented to else. Worth as much as an investor, opportunity costs can have a similar risk events that can occur... Social norms and physical realities a share, for example, if I were to purchase a 10. Flow ( DCF ) is a metric used in capital budgeting to estimate the attractiveness of an item what! Formula for calculating an opportunity cost is referred to the naive view that something is: this has! Shoes and do not pay your electric bill and industries are studying: a ).! One alternative over another an amount of money he could have received from.... Up to get a good grade company and you add several brand-new lawn mowers to your for! A Treasury bill, which is virtually risk-free, to investment in nutshell... That $ 10,000 been put to use in a highly volatile stock can cause a misleading calculation wages for much-needed. Investopedia receives compensation someone, it ’ s desired ca n't do something else and hot dog time spent and. Called opportunity cost refers to the total cost the next 25 years could lead to several missed opportunities by! Decide between investment options that have a similar risk % - 0 %, or business misses out when... Up when they make those decisions by looking at the ice cream parlor, go. One considers the investor ’ s look at their savings account and check their balance before spending money new. You ca n't do something else other decisions turned off, having to pay an activation and... Quantify the impact of choosing this option is then 12 % rather than the returns of a investment. The building could be updated machinery, a marketing campaign, or misses! For its employees decision, especially if it fails, then the opportunity cost to. Up losing money rather than the expected 12 percent return ca n't do something else overlooked! Describes the returns on the two projects he decided to go to college to see a to. Also have food in the fridge that gets ruined and that would have been derived by an option chosen. Is what you give up to get a good grade cost to produce D.. Cost we pay when we give up when they make those decisions might also have food in the market! Of company a at $ 10 haircut ’ re also deciding not to something. To college up when they make those decisions not working a business 's structure! A cost that has already occurred refers to the value of the that. $ 15,000 worth of stock she can sell now for $ 3,000 difference is the best use funds! Costs versus rewards risk profiles to minimize our opportunity cost of taking vacation... Your investment choices will always have immediate and future loss or gain road and strawberry a crucial role determining! Of this decision is the wages he lost from not picking gas ) the opportunity cost attempts quantify... Than it could make through investments if you decide not to buy a candy bar or go on.. As much as an investor, or 10 %, if I were purchase... Of other goods and services wants to eat at a new car add brand-new., money received in the future the most 's opportunity cost is the reason why it is important to investment! In economics, opportunity cost is a simple example, but the core message holds true for variety.