Where is the terminology of opportunity cost most often used?

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A question by :  Where is the terminology of opportunity cost most often used? Is it used when referring to investing? And how do you calculate it ??


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David Lin, Professeur

Opportunity cost is simply the cost of doing one thing versus another.  It is often used when investing money into something, whether it be to purchase equipment, buy stock, purchase a home, pay down debt, etc.  So to calculate the opportunity costs, you first need to identify what the other options are instead of the proposed investment.

For example, let’s say you’re comparing investing excess cash you have versus paying down debt.  You would have to calculate the interest, or growth you expect to receive by investing it.  This would be compared to the interest saved by paying the debt down now versus later.  The interest earned on the investment would be opportunity cost of paying down debt, and the interest saved on paying down debt would be the opportunity cost if you decided to invest the money instead.

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