The opportunity cost is associated with what is given up by choosing something else.
The opportunity cost , alternative cost or opportunity cost is an economic concept that allows us to name the value of the best option that does not materialize or the cost of an investment that is made with own resources and that causes other possible investments to not materialize. .
It could be said that the opportunity cost is linked to what an economic agent gives up when choosing something . The opportunity cost is also the cost of an investment that is not made (calculated, for example, from the expected profit based on the resources invested).
Emergence of the concept of opportunity cost
The value of the best unrealized option is how other professionals also know the aforementioned opportunity cost which, regarding its origin of appearance as a concept, we have to emphasize that it dates back to the beginning of the 20th century. And it was at that time, more specifically in 1914, when the economist Friedrich von Wieser invented and made it known.
Specifically, he made the “official presentation” of the term through one of his most important publications titled “Theory of social economy” . A work with which he came to consolidate his weight in history, and specifically in financial and economic history, because through it he not only established the concept that we are addressing but also caused special attention to be paid to issues such as the allocation of scarce resources or marginal utility.
The value of the best alternative that does not materialize constitutes the opportunity cost.
The risk calculation
For an investment to have financial logic, its return must be at least equal to the opportunity cost. Otherwise, more would be lost through discard than what is gained from the investment made.
The opportunity cost can also be estimated from the profitability that an investment would provide and taking into account the risk that is accepted. This type of calculation allows you to compare the risk that exists in the various investments that can be made.
Macroeconomics highlights that the opportunity cost can only be established from factors that are external to the investment.
Examples of opportunity cost
A man is preparing to invest his savings. One bank offers you an interest rate of 15% to make a fixed term, while another entity proposes that you invest in bonds that provide an interest of 12%.
The person, in this context, decides to invest their money in a fixed term; The opportunity cost, therefore, will be the 12% profit that the bonds would have given you.
We are approaching this concept basically from an economic point of view, but it is important that we recognize that our lives are also marked by opportunity cost on a personal level. Thus, any decision we make in our most private sphere will mean that it is influenced and determined by it.
An example would be that the weekend arrives and they propose two different plans for the same day and the same time, such as a night out with friends or a romantic dinner with your partner. In this case, faced with this situation, what we will do is choose the proposal that minimizes our opportunity cost.