What do you understand by opportunity cost?

Opportunity cost is the value in which an individual could have gotten or received but missed out on it due to choosing another option because they feel that one is better. The concept of it is what we going to take a look out.

Opportunity cost is very common and it has happen to everyone one way or the other, in sense that we choose or commit to a particular option over another either by judging the profit or other things to gain. For example, let’s say you have a choice to get a doughnut for $10. So the compromise is not being able the $10 on another stuff that same day and any other day, instead of making a saving from saving the $10 every day the same way.

The only way to save it is by asking yourself if you really value the doughnut, are you giving up anything after making the choice and what will the future be after making the choice.

For more vivid explanation, let’s put in a way of you choosing between holding your assets now for future sales and selling it now. The complication is that you can sell now and secure big gains and also lose out on bigger gains that could have been made in the future.

The problem or maybe not a problem is that opportunity cost is an unseen circumstance that can’t be predicted, therefore there’s no way to avoid it making it easily overlooked. But there’s an understanding that the opportunity missed when choosing an asset or an investment over another then to ensure a better and more profitable decision making. The only way to make an informed decision is by weighing the gains and losses of each decision to be made.

How to calculate it

There’s no really an exact way to calculate it but only to estimate the future value that you choose to ignore by not receiving it and compare it with the other value you choose to be committed to. When calculating opportunity cost the formula is *OPPORTUNITY COST (OC) = RETURN FROM THE MOST PROFITABLE OPTION (RFTMPO) - RETURN FROM CHOSEN OPTION (RFCO)*

To evaluate opportunity costs one need to consider and compare the costs and the benefits of every possible option available because every decision has its gains and losses.

On a long term, opportunity can help make personal decisions and also help with investment options and plans but all it requires is a good thinking for a long period of time. There’s also a possibility of you choosing a decision that will likely earn you more profit over a short period of time because sometimes long-term growth usually involves making decisions that will only offer returns in future.

*So considering opportunity cost won’t be a bad idea when making decisions to help prevent losses.

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