Pedro Arantes

Opportunity Cost

Opportunity cost is the loss of the benefit that could have been enjoyed if the best choice was chosen instead.
Zettelkasten, June 3rd, 2021.


  • Opportunity costs represent the potential benefits you miss when choosing one alternative over another.

  • You calculate using the formula:

OC=FOCO\text{OC} = \text{FO} - \text{CO}

where OCOC is the opportunity cost, FOFO, the return on the best-foregone option, and COCO, the return of the chosen option.

  • Positive opportunity cost is bad because you lose the opportunity to earn more.

    • Example, you have choices A, B, and C with Ba=100B_a = 100, Bb=80B_b = 80, and Bc=50B_c = 50 as their respective benefit. Considering you've chosen option B, your opportunity cost in this scenario is 10080=20100 - 80 = 20. You've lost the opportunity to earn 20 more benefits.
  • It's a microeconomic theory.

  • It's a decision mental model because it helps you choose among options.

  • It's difficult to calculate the exact cost of all options because some are unseen because of the implicit costs.

    • Implicit costs: these costs are hidden from the naked eye and aren't made known. They're not a direct cost to you. For instance, if you have a vacation home, the implicit cost is the rental income you could have generated if you leased it.
      • Implicit costs have significant potential. For example, if you start a company, you can make much more than the salary of a job.
    • Explicit costs are direct costs of an action executed through a cash transaction or a physical transfer of resources.


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