“Opportunity cost” refers to the sacrifice that an individual makes by not taking one course of action because of the potential benefits they might accrue by pursuing an alternative one. For example, if I choose to enter the workforce directly out of high school, I am sacrificing the potential career paths and higher salary that would come with a college education. However, because I choose to start my career much earlier than I would if I had devoted four additional years of my life to higher education, I am able to move up more quickly in my chosen field of work. The trade-off here is higher qualification vs. more time to advance in one’s chosen career, and the opportunity cost represents the sacrifice one must make by choosing one option or the other.
Calculating opportunity cost mathematically is easy: it is simply the difference between the best sacrificed option and the chosen option. Say that the production of a certain good (good “A”) is likely to generate a company a 10% profit over the next year. The production of an alternative good (good “B”) will generate a 15% profit. Perhaps there are long-term reasons for choosing good A over good B, such as a greater ease of systematizing it into existing marketing strategies or fluctuations in consumer demand. By choosing option A over B, your opportunity cost will be 15% - 10% = 5% - an opportunity cost of 5%. Many factors may influence a person or company to make a decision with an initial opportunity cost because of the potential for long-term gain. I choose to buy toothpaste today (as opposed to saving $2.50 and not buying anything) in order to protect the long-term health of my teeth. My opportunity cost is $2.50 - $0 = $2.50, but with the added knowledge of the future benefits of oral hygiene.