Opportunity cost is an economic concept that measures the relative cost of a decision based on alternatives given up in order to pursue it. Put simply, in making any decision, you must consider both the benefits of taking a certain path and the benefits of not taking that path – and the difference between these two sets of benefits is the opportunity cost.

To better understand opportunity costs, let’s look at the Formula For Calculating Opportunity Cost. In essence, this formula follows the basic rule of measuring the monetary value of lost potential future gains when something is sacrificed to acquire something else.

The official formula states: Opportunity Cost = (Value of Next Best Alternative) – (Value of Chosen Course of Action).

In other words, the opportunity cost represents what must be forfeited when you opt for one choice over another. Knowing this important concept can help you to make wise economic decisions and effectively manage your resources.