Opportunity Cost

Opportunity Cost is the potential gain that is sacrificed when a decision is made.

Opportunity Cost is an economic measurement of forgone opportunity when faced with a decision that requires resource allocation. A weighting between available options is made as to which has the most benefit in terms of reward versus risk when decision making.

This is because when one activity or decision is made, it eliminates the possibility of another. Therefore, the opportunity cost of any particular decision or activity is what one has to give up, or forego, in order to do the most beneficial one. For instance, when deciding between two different investment opportunities, historically one has provided higher returns at a higher risk whereas the other has provided lower returns accompanied by lower risk.

It is important to remember that without an alternate action to compare, opportunity cost does not exist, but when two options arise, the opportunity cost of one's action could manifest itself in the terms of an opportunity cost.

Let's say that a founder has a limited amount of capital available to them and needs to decide between spending money on marketing or hiring a team of developers to develop a product. The opportunity cost of the decision would be the potential gain the founder would have had from the other choice. In this case, it could be the potential gain from having more developers, which could result in releasing the product faster and gaining additional revenue, or the potential gain from the marketing, which could increase customer awareness and acquire more customers. The founder needs to weigh both potential gains and costs in order to make an educated decision.