Opportunity Cost

What Does Opportunity Cost Mean?

Opportunity cost is the value that is lost when a person rejects one option in favor of another. This is a term in finance that acknowledges that there is a financial loss for every major business decision, even if it results in a greater gain, all things considered.

Insuranceopedia Explains Opportunity Cost

When a person wants to make money from a property they own, they have two primary options: sell it or lease it. If they decide to sell it, the amount of money they would have made leasing it is the opportunity cost of that decision. Likewise, should they choose to lease it, the amount they could make selling it is the opportunity cost.

While it is an economic term, it is often used in other contexts. For example, when someone decides to pursue a college degree, the wages and work experience they will miss out on during their education is an opportunity cost of that decision.