Opportunity Cost is the cost of choosing one option over another. It is the value of the option you give up when you allocate your resources (like time, money, or effort) to a particular choice. Essentially, it’s the value of what you could have gained but didn’t because you chose a different path.
Example:
Imagine a company that has some extra money to invest, and they have two options:
- Option 1: Invest in the stock market, which can give them a 15% annual return.
- Option 2: Upgrade their equipment, which will generate a 12% annual return.
Now, if the company chooses Option 2 (upgrading equipment), they miss out on the extra 3% (15% -12%) they could have made with Option 1 (stock market). That 3% they miss out on is called the “opportunity cost.” It’s the profit they give up by choosing one option over the other.
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