Opportunity cost is defined, economically, as the loss of potential gain from other
alternatives when one alternative is chosen. In the world of economics, it refers to the
value of the next-highest-valued alternative use of that resource. Generally speaking, the
opportunity cost of an item is both the time and resources—typically money—sacrificed in
exchange for something. For example, if a farmer decides to invest his money on dairy
cows and spends his time operating the dairy, he cannot spend that time tending to a field
of crops or spend that money on seeds and fertilizer for those crops. In this scenario, the
crops are the opportunity cost of the dairy, because the farmer is giving up the opportunity
to raise and potentially sell crops in order to focus on the dairy operations. Decisions such
as this are made continually in businesses, as owners must make decisions regarding what
is worth their time and money or other resources such as human labor. Ultimately, this
decision is simply owners deciding if the risk is worth the potential reward, or if the risk is
too great.
One must make decisions regarding opportunity cost in their everyday lives. Just as in
businesses, on a daily basis one must make decisions regarding how to spend time and
money. What food to buy, whether to read or go out with friends, and even what time is the