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OPPORTUNITY COST

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The value of the next best alternative foregone. That's the definition of opportunity cost. Try to put it to memory. 🧠

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Every choice comes with a trade-off. 📚📺 When you decide to do one thing, you’re giving up the chance to do something else—and that “something else” might have been better. The value of the next best alternative you gave up? That’s opportunity cost. 💸 It’s not just theoretical. It’s real. It’s the price of every decision you make, whether you see it or not.  

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Types of Costs

Opportunity cost is part of a bigger picture of costs. It’s what you didn’t do, what you didn’t get, what you didn’t earn. Regrets hurt. 💔

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Explicit Costs or Accounting Costs: These are the obvious costs. The money you pay out. Rent, wages, tuition, supplies—those are easy to see, and they’re on the price tags. 🏷️ These are also known as accounting costs.

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Implicit Costs: Implicit cost specifically refers to opportunity cost. It’s the wage you didn’t earn because you decided to watch a movie. 💸 It’s the stock market return you didn’t get because you used your savings to start a business.  You don’t “see” these costs, they aren't explicit like on a price tag, but they’re very real.

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Economic Cost: ​Economic costs include both the implicit and explicit cost of something. Or another way to put it is the economic costs includes both the accounting cost and the opportunity cost. So many fancy words for the same thing!

Economic Cost = Explicit 🏷️ + Implicit 💸

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For example it costs let's say $150 HKD to go watch a movie - that's the explicit cost, but it also costs the two hours that you could have spent working as a fry cook 🍟 at burger place at a wage of $50 HKD per hour. That's the opportunity you give up - ergo opportunity cost. So the economic cost when you include both the implicit and explicit cost is actually $150 + $50 + $50 = $250 HKD. $250 HKD for a movie!!! 太貴喇

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Opportunity cost also connects to the concept of normal profit. Normal profit is basically the “bare minimum” you need to make so it’s worth it. Like, if you could’ve earned 7% investing in stocks 📈 but you chose to start a design business 👨🏼‍💻 your business needs to make at least 7% too. That 7%? That’s your opportunity cost. So normal profit = opportunity cost. 💰

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​Still confusing? Maybe get an economics tutor. ​Think of the opportunity cost of studying inefficiently without a tutor, all those painful hours of possible free time you're giving up. 

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This topic is vital for IB, IGCSE, A Level, AP Micro, AP Macro and HKDSE students. 

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