Opportunity Cost Example. This classification is made for decision making purposes. Examples of Opportunity Cost. When economists use the word “cost,” we usually mean opportunity cost. If she goes for the pair of shorts, she does so by giving up on the opportunity of buying the CD and, hence, in this case her opportunity cost would be the CD. The concept was first developed by an Austrian economist, Wieser. Spending on new roads. Opportunity cost also includes the utility or economic benefit an individual lost, it is indeed more than the monetary payment or actions taken. Examples are: Go on vacation now, or save the money and invest it in a house. Introduction Opportunity cost refers to what you have to give up to buy what you want in terms of other goods or services. Caroline has $15,000 worth of stock she can sell now for $20,000. A country’s government is preparing its budget. Opportunity cost also comes into play with societal decisions. Many people deposit their paycheck directly into a checking account, where it essentially sits stagnant. The opportunity cost of going to college is the wages he gave up working full time for the number of years he was in college. As an example, to go for a walk may not have any financial costs imbedded to it. Cost effectiveness ratios, that is the £/outcome of different interventions, enable opportunity costs of each intervention to be compared. Consider the following examples of opportunity cost: A young woman wants to spend her time either working as a financial advisor or volunteering for a non-profit. The cost of war. Companies use this concept for any capital or investing decision while calculating “Cost of Capital.” By the above-mentioned examples, you can understand what it means and how it can be applied in different scenarios to choose between the option. EXAMPLES OF OPPORTUNITY COSTS One way to demonstrate opportunity cost lies in the employment of investment capital. For example, the superior management of business assumes to earn 8% on a long-term $10,000,000 investment in a new manufacturing plant, or it can invest the cash in assets for which the supposed long-term return is 12%. The opportunity cost of taking a vacation instead of spending the money on a new car is not getting a new car. In this example, the opportunity costs are continued interest gains on bond "A" and the initial loss of $10,000 on bond "B" while hoping to recover it and increase your profits in the future. The opportunity cost is the cost of the movie and the enjoyment of seeing it. Mr. Brown makes $400 an hour as an attorney and is considering paying someone $1000 to paint his house. In the following example, we will be displayed with a real-life condition that will allow them to apply their knowledge on the notion of opportunity cost. We dont want to hear about the hidden or non-obvious costs. Opportunity cost is described as the lost benefit that would have been obtained if a specific option was selected. You can have many options with this cash. 7 Examples of Opportunity Costs. 5 Examples of Opportunity Costs. The producer takes money out of his pocket and pays to others. They choose this over having breakfast at home or sitting down in a restaurant for a full breakfast. Opportunity Cost is a very important concept if an individual/company wants to think rationally between the options. Every small business deserves to grow! This is an example of the law of increasing opportunity costs. They are also issuing debt for paying for this deal. Pay down debt now, or use the money to buy new assets … The opportunity cost approach is the one typically used in the valuation of voluntary labour time. 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