What is Opportunity Cost?

Opportunity cost is a key concept in economics, and it refers to the benefits given up when making a decision. It is the cost of foregoing a better alternative when making a choice. Opportunity cost measures the implicit cost of any action taken, and it helps people to consider their choices and make decisions that are economically savvy.

Put simply, opportunity cost means that when you choose one thing, you are choosing to give up something else. For example, if you buy a new jacket, the opportunity cost will include whatever else you could have done with your money, including buying something else or investing it. Even when choosing to do something without monetary cost, such as taking a walk in the park, you are giving up the opportunity to do other things, such as spending time with a friend.

Understanding Economic Opportunity Cost

Opportunity cost is closely associated with the concept of scarcity. Scarcity, in economics, is the result of people having limited resources, in terms of money or the time needed to pursue something. In a scarce economy, choices must be made to maximize resources, and opportunity cost can be used to help make those decisions.

As an example, let’s say you have time and money to do either one: A) take an evening class or B) get a few extra hours at work. The best choice will depend on which option is more valuable to you. If you choose to take the class and not work, your opportunity cost is the income you could have earned from the extra hours at work. On the other hand, if you choose to work and not take the class, your opportunity cost is the benefit of the knowledge you could have gained from the evening class.

Incorporating Opportunity Cost Into Everyday Decisions

Every decision we make involves an opportunity cost, and understanding the cost of our decisions is key to a healthy and successful life. By incorporating opportunity cost into decision-making, you can think more critically about your choices and make more financially savvy decisions.

It is important to remember that opportunity cost is not only associated with money. Time, energy, and sometimes, things like relationships and health, all have an associated opportunity cost. By understanding opportunity cost, and accounting for it in all decisions, you can make better choices that will benefit you in the long run.