Opportunity costs

You may hear on the radio "The opportunity cost of holding gold is ......"

So what is "opportunity cost"? Simply put it is the result of doing one thing that precludes you from doing something else more profitable. And the amount of the "cost" is the difference between the benefit that you get and the benefit that you could have got.

Let's take an example - I have say, R1m to invest. I put in in a FNB a call account for a year and earn 6% which is R60 000. But I could have bought unit trusts and earned say, 10%, or R100 000. Then the opportunity cost of investing in the call account as opposed to the unit trusts is R100 000 - R60 000 = R40 000.

Notice that when there are lots of alternatives, it is only correct to say that the opportunity cost of doing one thing as opposed to something else is so much. You can't just talk about the opportunity cost of doing one thing (like holding gold as they do on the radio).

 

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