Opportunity Cost

The cost of foregoing an alternative to the course of action that is taken. An investor who buys some securities is foregoing the interest that could be earned by leaving the money in a bank. A company that spends money on developing a new product it hopes to bring to market in five years is foregoing the profits it could earn by spending the money on marketing existing products. Every action taken involves the loss of the opportunity to do something else. The estimation of opportunity costs is crucial to ensuring that resources are used effectively.