Before we proceed further, we must understand the concept of opportunity costs. Opportunity Cost is the benefits of the next best alternative forgone. In any economy, resources are scarce but have multiple uses. The economy allocates these scarce resources to the most productive activity. But this would mean that any benefit from the other possible uses cannot be realized.
Suppose, you have $10,000 savings. You have three options, either to purchase stocks and earn returns of 10% or $1000, or you can purchase bonds and earn a return of 5% or $500 and the final option is you lend the money to a friend and earn an interest rate of 3% or $300. Your savings is a scarce resource which can be used for only one of the three options. Obviously, you would choose to invest them in stocks as you earn the highest return possible by doing so. This would mean that you cannot invest the savings in bonds and thus lose out on the “opportunity” to earn the return from that transaction.
Call Us: USA +1 862 207 3288