Is Opportunity Cost Only The Next Best Option

Is opportunity cost only the next best option

A sunk cost is a cost that has already been incurred; the money that has gone into a sunk cost is no longer accessible.

Is opportunity cost only the next best option

Meanwhile, an opportunity cost refers to potential returns not gained due to not making a particular choice. So the difference between the two is between money that has actually been spent and money that would have been earned.

For example, if you invest in stocks, the money that you initially spent on those stocks is your sunk cost.

What Is Opportunity Cost?

And if you earn money from those stocks, the opportunity cost of the choice to invest is the money you would have earned if you’d invested in stocks from a different company.

Let’s say you invested in a cosmetic company called Acme Beauty.

You spent $5,000 on the initial stocks and made a profit of $2,000 after two years.

Is opportunity cost only the next best option

But it turns out that if you had instead purchased $5,000 worth of stock from a company called Natural Beauty, you would have made a profit of $3,000 after two years. In both cases, your sunk cost would have been $5,000. But your opportunity cost in choosing Acme Beauty over Natural Beauty was the $1,000 you missed out on that you would have earned from the latter.

Is opportunity cost only the next best option