Opportunity cost

Opportunity cost is the value lost by choosing one alternative instead of another. It is the value of the sacrificed alternative in choosing something else.

For example, doing a job that pays only $5 per hour when you could have taken a different job at $12 per hour has an opportunity cost of $7 per hour. Wasting three hours stuck in traffic has an opportunity cost of the money you could have been making for those three hours. Opportunity cost isn't always calculated by the difference in price. For example, wasting three hours stuck in traffic has an opportunity cost of the things you could do instead of being stuck in traffic, such as watching a movie. This is where the famous saying there's no such thing as a free lunch comes from. No lunch is ever free because you will always have an opportunity cost. The opportunity cost of choosing this "free lunch" is a different lunch that you could have picked.

Opportunity cost is not recognized in calculating accounting cost and profits, but is recognized in calculating economic costs and profits.