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How do you explain opportunity cost?
I keep seeing this explained differently in different places, I don't know which is right?
"Opportunity cost is the cost of any activity measured in terms of
the value of the next best alternative forgone (that is not chosen). It
is the sacrifice related to the second best choice available to
someone, or group, who has picked among several mutually exclusive choices."
If a set of choices are "mutually exclusive", then only one of the choices can occur or be chosen. For example, if you flip a coin once, the event that the coin lands heads up and the event that the coin lands tails up are mutually exclusive events.
Life example: Your friend has invited you to go on holiday with them for the same week you are due to go on holiday with your parents. You can't go on both holidays since these two events are "mutually exclusive". The opportunity cost of going on holiday with your parents is the value/ utility you would have derived from going on holiday with your friend.
Economics example: You have £500 to invest. You visit your broker and they offer you three £500 investment opportunities, A: invest in Apple shares, B: invest in Tesco shares or C: invest in Gold.
You decide to invest in Apple shares. Over the next year, the price of Apple stock, Tesco stock and Gold rise by 50%, 10% and 40% respectively.
The monetary opportunity cost of investing in Apple stock is the cost of not investing in the next best alternative forgone. The opportunity cost of investing in Apple stock was, therefore, not owning £500 x 140% = £700 of Gold at the year-end.
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