Opportunity cost plainly stated is the cost of not doing something else. Whenever we purchase one good or service, we’re also deciding not to buy a range of other goods and services.
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Take for example if I were to purchase a $10 haircut. Because I’m buying a $10 haircut, I cannot use those same $10 to buy pizza, or to buy a pair of socks, or to buy a basketball.
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The transcript is for your convenience
Opportunity cost is defined as the cost of not doing the next best alternative. So, in this case, the thing I would most likely besides a haircut is pizza. So, in this case, the opportunity cost of buying a $10 haircut is that I cannot buy pizza.
Opportunity cost also relates to how we spend our time. Again, whenever we spend time doing one thing, we’re also deciding not to spend our time doing other things. So, say I decide to be a waiter. I cannot be employed at other companies as well. If I were a waiter, I cannot also work at a grocery store, or mow lawns, or rake leaves. So, in this case, because I’m not a waiter, the next best option for me would be to rake leaves. So, because I’m not a waiter, I cannot rake leaves. So, the opportunity cost of being a waiter is that I cannot rake leaves. Opportunity cost is often discussed both in and outside of economics. Businesses try to limit their opportunity cost by always making the best decision.
The next lesson: How Banks Function, both lessons are included in Practice Tests.