Since resources are limited, every time you make a choice about how to use them, you are also choosing to forego other options. Economists use the term opportunity cost to indicate what must be given up to obtain something that’s desired. A fundamental principle of economics is that every choice has an opportunity cost. If you sleep through your economics class (not recommended, by the way), the opportunity cost is the learning you miss. If you spend your income on video games, you cannot spend it on movies. If you choose to marry one person, you give up the opportunity to marry anyone else. In short, opportunity cost is all around us. The idea behind opportunity cost is that the cost of one item is the lost opportunity to do or consume something else; in short, opportunity cost is the value of the next best alternative. Since people must choose, they inevitably face trade-offs in which they have to give up things they desire to get other things they desire more. Opportunity Cost and Individual DecisionsIn some cases, recognizing the opportunity cost can alter personal behavior. Imagine, for example, that you spend $8 on lunch every day at work. You may know perfectly well that bringing a lunch from home would cost only $3 a day, so the opportunity cost of buying lunch at the restaurant is $5 each day (that is, the $8 that buying lunch costs minus the $3 your lunch from home would cost). Five dollars each day does not seem to be that much. However, if you project what that adds up to in a year—250 workdays a year × $5 per day equals $1,250—it’s the cost, perhaps, of a decent vacation. If the opportunity cost were described as “a nice vacation” instead of “$5 a day,” you might make different choices. However, the single biggest cost of greater airline security doesn’t involve money. It’s the opportunity cost of additional waiting time at the airport. According to the United States Department of Transportation, more than 800 million passengers took plane trips in the United States in 2012. Since the 9/11 hijackings, security screening has become more intensive, and consequently, the procedure takes longer than in the past. Say that, on average, each air passenger spends an extra 30 minutes in the airport per trip. Economists commonly place a value on time to convert an opportunity cost in time into a monetary figure. Because many air travelers are relatively highly paid businesspeople, conservative estimates set the average “price of time” for air travelers at $20 per hour. Accordingly, the opportunity cost of delays in airports could be as much as 800 million (passengers) × 0.5 hours × $20/hour—or, $8 billion per year. Clearly, the opportunity costs of waiting time can be just as substantial as costs involving direct spending. Opportunity Cost Video
IntroductionOpportunity cost refers to what you have to give up to buy what you want in terms of other goods or services. When economists use the word “cost,” we usually mean opportunity cost.
Definitions and BasicsOpportunity Cost, from the Concise Encyclopedia of Economics
Getting the Most Out of Life: The Concept of Opportunity Cost, by Russ Roberts on Econlib
Opportunity Cost, a LearnLiberty video.
Opportunities and Costs, by Dwight Lee. The Freeman.
In the News and ExamplesOpportunity cost, rock concerts, and grades: A Fable of the OC, by Mike Munger on Econlib.
Biggest cost of college is what students could otherwise earn by working. See Human Capital Gary Becker, Concise Encyclopedia of Economics
Opportunity cost, movies, and reading:
Opportunity cost and TANSTAAFL: Chris Anderson on Free. EconTalk podcast episode, May 12, 2008. Specifically, explanation of the economic meaning of “There ain’t no such thing as a free lunch,” starting at time mark 47:11.:
How not to calculate opportunity cost–thinking of only similar goods: What is Opportunity Cost? by David Henderson. EconLog, July 26, 2011.
How not to calculate opportunity cost–double counting: War Economics by Arnold Kling. EconLog, March 7, 2003.
Opportunity cost and crowding out of public projects. Public funding of public works projects is at the expense of other alternative, forgone, and equally worthy projects and goals. See: “The Seen and the Unseen: The Costly Mistake of Ignoring Opportunity Cost”, by Anthony de Jasay.
Opportunity Cost and Hidden Inventions, by Dwight Lee. PDF file at CommonSenseEconomics.com. First published in The Freeman
Ticket Scalping and Opportunity Cost. EconTalk podcast, April 10, 2006.
A Little History: Primary Sources and ReferencesEarly use of the term “opportunity cost”: The Theory of Choice and of Exchange, by Frank Knight. Part II, Chapter 3 in Risk, Uncertainty, and Profit
Advanced ResourcesChapter 1. L.S.E. Cost Theory in Retrospect, by James M. Buchanan and George F. Thirlby. L.S.E. Essays on Cost
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