The definition of opportunity cost is the potential gain lost by the choice to take a different course of action when considering multiple investments or avenues of business. When weighing two or more courses of action, the opportunity cost refers to the value of the option you necessarily sacrifice in order to pursue the option you decide upon. Regardless of which option is chosen, there will be a cost assigned to the option that is forgone—that is the opportunity cost.
Use this formula to define opportunity cost:
Opportunity Cost = Benefit of Chosen Investment – Benefit of Forgone Investment
In any business, strategic action and investment are key to profitability. Considering the costs associated even with wise decisions is important to decisions going forward. While this opportunity cost definition chiefly references business strategy, it may also be applied advantageously to personal finance decisions.