Opportunity cost: Difference between revisions
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Opportunity cost is an economic concept that means "the value of the next best alternative". The best way to explain it is with a few examples: | '''Opportunity cost''' is an economic concept that means "the value of the next best alternative". The best way to explain it is with a few examples: | ||
1. If I quit my job and spend a year travelling, the direct cost is whatever I spend on plane tickets, food and accommodation while travelling. The opportunity cost is that direct cost plus the year's salary foregone - because if I hadn't gone travelling, not only would I have saved the money, I would have earnt a salary as well. | 1. If I quit my job and spend a year travelling, the direct cost is whatever I spend on plane tickets, food and accommodation while travelling. The opportunity cost is that direct cost plus the year's salary foregone - because if I hadn't gone travelling, not only would I have saved the money, I would have earnt a salary as well. | ||
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 done with that money. | 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 done with that money. | ||
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Revision as of 09:39, 8 November 2007
Opportunity cost is an economic concept that means "the value of the next best alternative". The best way to explain it is with a few examples:
1. If I quit my job and spend a year travelling, the direct cost is whatever I spend on plane tickets, food and accommodation while travelling. The opportunity cost is that direct cost plus the year's salary foregone - because if I hadn't gone travelling, not only would I have saved the money, I would have earnt a salary as well.
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 done with that money.