Does the principle of opportunity cost states that if you have more of one thing you must have less of another

Question

Does the principle of opportunity cost states that if you have more of one thing you must have less of another

Answer 1

No, that is not what it says. The principle of opportunity cost says that if you commit money, time, or resources for a particular use, then you must necessarily lose the opportunity to invest the same money, time, or resources into any potential alternative use. So in evaluating the cost of applying resources to a particular use, you must consider the opportunity cost of NOT applying the resources to the alternative use with the next highest benefit. The benefit forgone is the opportunity cost.

For example, suppose you are planning to buy a new car for $30,000, and you decide to pay for the car with cash up front to avoid having to borrow money and pay interest on the loan. To come up with the cash up-front, you decide to withdraw an amount equal to the purchase price from you retirement savings. If your retirement savings is expected to earn 6 percent per year, then the opportunity cost of purchasing the car is $1,800 per year.

If the car dealer offers you financing at a rate of 1.9 percent per year for five years, then the cost of borrowing would be substantially less than the opportunity cost of paying cash up-front. So, in this example, it is generally better to borrow the money at a low interest rate rather than forgoing the expected returns on your retirement savings.