The opportunity cost, alternative cost or opportunity cost is an economic concept that allows us to name the value of the best option that does not materialize or the cost of an investment that is made with its own resources and that makes other possible investments not materialize..
It could be said that the opportunity cost is linked to what an economic agent gives up when choosing something. Opportunity cost is also the cost of an investment that is not made (calculated, for example, from the utility expected from the resources invested).
According to abbreviationfinder.org, the value of the best unrealized option is how other professionals also know the aforementioned opportunity cost that, regarding its origin of appearance as a concept, we have to underline that it dates back to the beginning of the 20th century. And it is that it was at that time, more specifically in the year 1914, when the economist Friedrich von Wieser invented and made known the same.
Specifically, he made the “official presentation” of the term through one of his most important publications entitled “Theory of the social economy”. A work with which he came to consolidate his weight in history, and specifically in financial and economic history, because through it he not only established the concept that we are dealing with but also caused special attention to be paid to issues such as the allocation of scarce resources or marginal utility.
For an investment to make financial sense, its return must be at least equal to its opportunity cost. Otherwise, it would be more what is lost by discarding than what is gained by the investment made.
The opportunity cost can also be estimated based on the return that an investment would provide and taking into account the risk that is accepted. This type of calculation allows comparing the existing risk in the various investments that can be made.
Macroeconomics emphasizes that the opportunity cost can only be established from factors that are external to the investment.
Opportunity Cost Example: A man is about to invest his savings. A bank offers you an interest rate of 15% to make a fixed term, while another entity suggests that you invest in bonds that offer an interest of 12%. The person decides to invest his money in a fixed term; the opportunity cost, therefore, will be the 12% profit that the bonuses would have given him.
We are approaching this concept basically from an economic point of view, but it is important that we recognize that our lives are also marked by opportunity cost on a personal level. Thus, any decision we make in our most private sphere will assume that it is influenced and determined by it.
An example would be that the weekend arrives and they propose two different plans for the same day and the same time, such as a night out with friends or a romantic dinner with your partner. In this case, given this situation, what we will do is choose the proposal that minimizes our opportunity cost.