What is opportunity cost?

Views 37KAug 9, 2023

Core points

● opportunity cost refers to the value of a second-best choice abandoned after making the best choice.

The two prerequisites for the existence of ● opportunity cost are the multi-purpose and scarcity of resources.

● in life, many of your choices have to pay the opportunity cost

Detailed explanation of concept

Opportunity cost means that people often need to do a single topic, and if they choose one of the best options, they must give up the other options, in which the value of the abandoned sub-optimal choice is the opportunity cost of this choice, also known as "alternative cost".

As we often hear, "you can't have both a fish and a bear's paw". When the money in hand is limited, if you buy a bear's paw, you can't afford to buy fish, then the fish you give up is the opportunity cost of this choice.

There are two main prerequisites for the existence of opportunity cost. First, resources have many uses, and second, resources are scarce. The resources here include all valuable things such as money, time, land and so on.

For example, the same amount of money can be used not only to buy stocks, but also to deposit in the bank. At the same time, money is limited and scarce, and once all is used to buy stocks, it cannot be deposited in the bank.

An example of opportunity cost

In life, you will be faced with many choices, each of which will have to pay the opportunity cost, such as:

1. You have 10,000 yuan in your hand. If you use it to buy stocks, your expected annualized return is 10%. You can also deposit it in the bank, with an annualized interest rate of 2%. If you choose to buy stocks, no matter what the stock returns are a year later, the opportunity cost of buying stocks is the bank's annual interest, that is, 10000.2% 200 yuan.

2. You have an afternoon, which can be used not only to study investment courses in Niuniu class, but also to entertain and relax. If you choose to study, then the opportunity cost you pay is a relaxed and happy afternoon.

Disclaimer: The above content does not constitute any act of financial product marketing, investment offer, or financial advice. Before making any investment decision, investors should consider the risk factors related to investment products based on their own circumstances and consult professional investment advisors where necessary.