All Economics Terms A-Z

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Economics Terms A-Z

Opportunity Cost

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In its simplest form, opportunity cost refers to the loss of the positive results of a decision when an alternative decision is made. It refers to the actual loss incurred by not choosing one option when another is selected. This cost does not only refer to money, but any lost benefits which may result in choice. A simple example of this would be that the opportunity cost of using a machine to make one product is the production of another product. That is, the second product cannot be produced, and its not being produced is an opportunity cost.

Opportunity costs are involved in almost all decisions that are made in economics, but not always. For instance, if the machine involved in the aforementioned example is built to only make one product, there is no opportunity cost involved, as no sacrifice of other products is needed; they couldn’t be produced anyway. There are explicit opportunity costs and implicit costs. Explicit costs refer directly to the money given out, and this money, which is given out, is itself the opportunity cost. Implicit costs do not refer to money, but to the choice not to allocate time or resources to other alternative uses.