Opportunity Cost Calculator
Calculate the cost of choosing one option over another
Table of Contents
How to Use
- Enter a label for Option A (e.g., 'Stock Investment')
- Enter the expected return for Option A
- Enter a label for Option B (e.g., 'Bond Investment')
- Enter the expected return for Option B
- Click calculate to see the opportunity cost
What is Opportunity Cost?
Opportunity cost is the value of the next best alternative that you give up when making a choice. It's not just about money you spend, but also about the benefits you miss out on by not choosing the alternative option.
In economics and finance, opportunity cost helps quantify trade-offs. Every decision has an opportunity cost—even doing nothing has the opportunity cost of what you could have achieved by taking action.
How to Calculate Opportunity Cost
The formula for opportunity cost is:
Opportunity Cost = Return of Best Foregone Option - Return of Chosen Option
- List all available options and their expected returns
- Identify the option you're choosing
- Identify the next best alternative (foregone option)
- Subtract the chosen option's return from the foregone option's return
- The result is your opportunity cost
Real-World Examples
Common opportunity cost scenarios:
- Investing in stocks vs. bonds: The opportunity cost is the difference in returns
- Going to college vs. working: Opportunity cost includes tuition plus foregone wages
- Starting a business vs. keeping your job: Opportunity cost is your salary and benefits
- Buying vs. renting: Opportunity cost includes investment returns on down payment
- Time spent on one project vs. another: Opportunity cost is the value of the alternative use of time
Why Opportunity Cost Matters
Understanding opportunity cost helps you:
- Make more informed financial decisions
- Compare options on an apples-to-apples basis
- Understand the true cost of your choices
- Prioritize investments and resources effectively
- Avoid overlooking hidden costs of decisions
- Think beyond just monetary costs to include time and other resources
Frequently Asked Questions
- Is opportunity cost always measured in money?
- No. While often expressed in dollars, opportunity cost can represent time, satisfaction, or any other valuable resource. The key is identifying what you give up by choosing one option over another.
- Can opportunity cost be negative?
- Not really. By definition, opportunity cost is what you give up. If the chosen option is better than all alternatives, the opportunity cost is effectively zero because you're not giving up anything of greater value.
- How do I know which option to compare for opportunity cost?
- Compare your chosen option against the next best alternative—the option you would have chosen if your first choice wasn't available. If you're comparing multiple options, calculate opportunity cost for each to find the best choice.
- Should I always choose the option with the lowest opportunity cost?
- Generally yes, but also consider risk, timing, and non-financial factors. The option with the lowest opportunity cost typically maximizes value, but your personal circumstances, risk tolerance, and goals should also influence the decision.