How to Define Opportunity Costs

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Opportunity costs are defined as the difference between the money a person could have earned and the money that was actually earned. Find out how opportunity costs are created when a person chooses to spend time doing something less profitable with information from a certified public accountant in this free video on business and accounting terms.

Part of the Video Series: Business & Accounting Terms
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Video Transcript

We're going to define opportunity costs. When we apply resources, such as money, to an enterprise and pursue the profit, there is another cost not often considered. Let's say we have the opportunity to go in the business selling cigars with an investment of a hundred thousand dollars. That pursuit results in an annual profit of a thousand dollars. Had we decided not to sell cigars, and rather put our money in the bank and earn four percent on a savings account, the opportunity cost is the difference between the money we could've earned and the money we did earn. You could have a job working as a bartender and make five hundred dollars a day, as a bartender. If you could've worked as an actor, and earned a thousand dollars a day, the difference between what you could've earned and what you did earn is the opportunity cost. That cost of choosing to apply your time to something less profitable.

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