Definition of Opportunity Cost

The concept of opportunity cost (which in some places may appear as cost of chance) is a concept that comes from the economic area and is used in the world of finance, business and micro and macroeconomics to refer to an abstract investment measure from which practical estimates are made on the driving of the capital that a company or a business can have.

The opportunity cost concept is considered to have existed since the early 20th century, more specifically since 1914, the year it was invented by the economist Friedrich von Wieser. Probably, the emergence of this term or concept had to do with the economic situation of the context that supposed an increasing approach to the crisis and the 1st World War.

In specific terms, the concept of cost or opportunity cost is used in the economy to point to the cost that all investment means when one possibility is prioritized over the other. Thus, the opportunity cost represents something imaginary or fictitious, that is, that investment that was not made to prioritize another considered more urgent, more important, more necessary, etc. Although at first, the idea of ​​opportunity cost may seem useless or uninteresting because it is based on that that did not happen in practice, it does gain utility when it is projected in the future what the costs of choosing an investment and not the other. It also helps to know what happened and how that

decision may or may not have benefited the company, partners, institution, etc.

For example, the opportunity cost would be to choose between two possible investments: place a savings in a branch of a fast-food chain or set up your own restaurant. The choice is obviously made taking into account what can be considered most beneficial: thus, this choice involves an opportunity cost because having chosen it should be measured or taken into account the cost that this choice (timely or not) may mean for those who carry out the deal. In this sense, it is important to make it clear that the opportunity cost is related to the concept of cost effectiveness since it is, in short, one more element to be able to measure the profitability that an investment choice has on the business.

Opportunity Cost Issues