Opportunity Cost

The opportunity cost of using a resource is the value of its best foregone alternative. Economists count opportunity costs as implicit costs alongside explicit (cash-outflow) costs: the owner-manager's foregone salary, the rent the firm could earn by leasing out its own building, the interest its capital could earn elsewhere. Economic profit subtracts both explicit and implicit costs from revenue, so it is strictly less than accounting profit (which ignores implicit costs).

When to use

Use opportunity cost whenever you need the economic answer to "should the firm continue this activity?" rather than the accountant's answer. The classic exam trap: a firm reports positive accounting profit, but once you net out the owner's foregone salary or the implicit rent on owner-occupied space, economic profit is negative — and the resource should be reallocated. Contrast with Sunk Cost, which is the opposite trap: an already-paid cost that must be ignored in forward-looking decisions.