What is Opportunity Cost?

Money, time and resources
Opportunity cost in a small business

Opportunity cost is what you give up when you choose one option over another: the value of the next-best option you didn't take. If you spend Saturday on one client's project, the opportunity cost is what you'd have earned or gained from the other way you could have spent that Saturday. It doesn't appear as a line on your profit and loss statement, but it matters whenever you choose between uses of your time or money.

OpenStax's open textbook Principles of Economics 3e says: "Economists use the term opportunity cost to indicate what people must give up to obtain what they desire. The idea behind opportunity cost is that the cost of one item is the lost opportunity to do or consume something else. In short, opportunity cost is the value of the next best alternative" (OpenStax, section 2.1, opened October 29, 2026).

Money, time and resources

Opportunity cost can be measured in time and resources as well as dollars. OpenStax's chapter summary says: "Opportunity cost measures cost by what we forgo in exchange. Sometimes we can measure opportunity cost in money, but it is often useful to consider time as well, or to measure it in terms of the actual resources that we must forfeit" (chapter 2 key concepts and summary).

OpenStax's Principles of Managerial Accounting applies the idea to business decisions: "When choosing between two alternatives, usually only one of the two choices can be selected. When this is the case, you may be faced with opportunity costs, which are the costs associated with not choosing the other alternative" (section 10.1).

Opportunity cost in a small business

Principles of Economics 3e describes a small business's implicit costs as opportunity costs: "They represent the opportunity cost of using resources that the firm already owns. Often for small businesses, they are resources that the owners contribute. For example, working in the business while not earning a formal salary, or using the ground floor of a home as a retail store are both implicit costs" (section 7.1).

That's why accounting profit and economic profit differ. OpenStax says "Accounting profit is a cash concept. It means total revenue minus explicit costs," while "Economic profit is total revenue minus total cost, including both explicit and implicit costs."

Opportunity cost and sunk cost

A sunk cost is money already spent that you can't get back. OpenStax defines sunk costs as "costs that we make in the past that we cannot recover." Opportunity cost looks forward, at what you give up by choosing now. A sunk cost looks back, at money that's already gone whichever option you choose.

Sample: choosing between two jobs

This is a sample with invented figures for a fictional designer, Oak Hill Studio, which has one free day and two jobs it could take that day. Each job takes 8 hours, and the materials cost is the same for both.

Job A: a fixed fee of $1,200.00.
Job B: 8 hours at $110.00 an hour = $880.00.

If Oak Hill takes Job A, its next-best alternative is Job B, so the opportunity cost of choosing A is $880.00, the income it gives up from B. Job A still comes out ahead: $1,200.00 − $880.00 = $320.00 more than the alternative.

If it took Job B instead, the opportunity cost would be the $1,200.00 from Job A, and B would come out $320.00 behind.

Money isn't the only factor. If Job B came from a client likely to send repeat work, that could change the decision; opportunity cost is a way to compare the options, not a rule that decides for you.

Where Billed fits

Billed's time tracking page says you can "see how much time goes into each project," and that "Past entries also give you a record to estimate the next project from." Knowing how long similar work took can help you compare what each option would cost you in time.

Frequently Asked Questions

What is opportunity cost in simple terms?

It's what you give up by choosing one option instead of another. OpenStax's Principles of Economics 3e calls it "the value of the next best alternative."

Can opportunity cost be measured in time?

Yes. OpenStax's Principles of Economics 3e says: "Sometimes we can measure opportunity cost in money, but it is often useful to consider time as well, or to measure it in terms of the actual resources that we must forfeit."

What is the difference between opportunity cost and sunk cost?

Opportunity cost is what you give up by making a choice now. A sunk cost is money already spent that you can't recover, whichever option you choose. OpenStax defines sunk costs as "costs that we make in the past that we cannot recover."

Is opportunity cost on the income statement?

No. Accounting profit counts only explicit costs, the actual payments. OpenStax explains that economic profit also counts implicit costs, which "represent the opportunity cost of using resources that the firm already owns", such as an owner working without a formal salary.

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What is Opportunity Cost? A Simple Guide for Small Business