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From Citizendium, the Citizens' Compendium

Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. In other words, the opportunity cost of a decision is based on what is given up for the next best alternative. Any decision, action, or benefit that involves a choice between two or more options has an opportunity cost. Everything we do can have an opportunity cost. Opportunity cost happens in our daily lives. Most opportunity costs can involve all different types of monetary value such as profit, capital, assets, expenses, etc. The best way to explain it is with a few examples.

Example 1:

If I quit my job and spent a year traveling, the direct cost is what I spent on the plane ticket, food, and accommodations. The opportunity cost is that direct cost plus the year's salary foregone. If I did not travel, not only would I have saved money, I would have earned a salary for that year.

Example 2: If I buy a new pair of shoes, the direct cost is what I paid for them. The opportunity cost is the value of the next best thing I could have bought with that money.

                Opporunity Cost in Finance

In Finance, the cost of capital is the opportunity cost because it is the minimum return which an investor requires. For shareholders, it is the dividend they expect to receive plus a capital gain on the value of their shares. For loan holders, it is the rate of interest which is quoted on the loan. Failure to pay such required returns will result in the providers of finance, transferring their holdings to other opportunities with a better rate of return.

           Opportunity Costs vs. Accounting Costs

As far as we know, from the economists and accountants perspective, there is an equally critical source of confusion about oppotunity costs. Economists and accountants use the term "Cost" to refer and differentiate things in their perspective. Economists defined cost as an opportunity or thing that is being forfeit when making a decision. Hence, economic costs are simply benefits lost. Economic costs are skewed seen only from the perspective of a decision maker not an observer. Economic cost estimates are used for making decisions about pricing, output levels, buying or making, alternative marketing tactics/strategies, product introductions and withdrawals, etc. Accountants define cost in terms of resources consumed. Hence, from an accountant’s position, costs are objectives seen from the perspective of an observer. Accountants usually define costs as flows. Accounting costs reflect changes in stocks over a fixed period of time. Accounting cost measures the evaluation of managerial performance and as a basis for economic cost estimation.

Yet, not all opportunity costs deal with monetary value or financial concepts. Opportunity costs can also deal with time consuming, person hours, mechanical output, pleasure, limited resources, etc. It is useful when evaluating the cost and benefits of choices.

Example 3:

If a student spends every weekend studying, the opportunity cost is not being able to spend time with his/her friends. However, the student could get a better grade in school, but he/she will miss out on what his/her friends are doing.