Opportunity Cost
✏️ In one line
Opportunity cost is the value of the next best option you give up when you make a choice.
📖 Story time
- On Saturday evening Arun can either help at Meera's shop for ₹300 or play a cricket match.
- He chooses cricket.
- Cricket didn't cost him a ticket, but it still cost him something: the ₹300 he could have earned.
- That ₹300 is the opportunity cost of playing cricket.
🎯 Your turn
Kabir leaves a job that paid ₹40,000 a month to run his own startup. What is the opportunity cost of running the startup?
Nice! Correct. The salary is the next best option he gave up, so it is his opportunity cost.
Not quite. Hint: What did Kabir give up to do this?
Arun: Arun has 2 free hours. His options, best first: 1) study for a test, 2) watch a movie, 3) take a nap. He chooses to study.
What is the opportunity cost of studying?
Nice! Yes! Opportunity cost is only the next best option, which here is the movie.
Not quite. Hint: Count only the option ranked just below his choice.
Opportunity cost adds up every option you gave up.
Nice! Right, it's false. You can only do one thing in place of your choice, so only the next best option counts.
Not quite. Hint: Could Arun have watched the movie AND napped in those same 2 hours?
Meera's oven can bake cakes or loaves of bread. Slide to make 3 cakes and watch how much bread she gives up.
Nice! Going from 2 to 3 cakes, bread falls from 14 to 8. Meera gives up 6 loaves: that is the opportunity cost of the 3rd cake. This curve is called a production possibility curve.
Not quite. Hint: Move the slider until the cakes reading says 3.