QS Study

Opportunity Cost enters into your decision-making criteria when you have several options to consider, including spending the money on several choices of investment. It is the cost of an alternative that must be forgone in order to pursue a certain action. It refers to the value forgone in order to make one particular investment instead of another.

For example, you own a storage space in a shopping mall. You can open a store using that space but you would then need to invest in the furniture, displays etc. Alternatively, you could just rent out space to a potential seller and gel rental revenue.

Your decision would depend on how much money you would estimate to profit from selling my products (after my investments) compared to how much money you would earn from renting the space. There might be another possibility. You could rent half of the space and use the other half to sell your stuff (changing my opportunity cost). Opportunity Cost represents the benefits an individual, investor or business misses out on when choosing one alternative over another. These cost analysis also plays a critical role in determining a business’s capital structure.