What is Opportunity Cost?

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Opportunity cost arises whereby you are forced to make a decision between two options, usually because of financial constraints. The 'opportunity cost' is the option that you do NOT choose.


For example, imagine that you are a delivery shop owner that has just been loaned £10,000 from the bank for improvements. You can either choose to buy a new delivery van for £6000 which will allow you to increase your amount of customers, or you can choose to buy a new low-fat fryer for £5000 which will improve quality (but you can't buy both).
If you choose the delivery van, then you concede the opportunity cost of improved quality as this is a missed opportunity that could have improved the business (hence it can be considered to have 'cost' you).

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