What is an Opportunity Cost?

Opportunity cost, one of the most important concepts in economics.  Everyone understands what an opportunity cost is, even if they do not recognize it as an opportunity cost.  If you rearrange the words, it sheds some light on its meaning, the cost of an opportunity.  Another way to think about opportunity cost is as a trade off, whenever you choose to do something you are trading away another opportunity.

Think about it, whenever you choose to do anything, you are either using money (by buying something), or at the very least your time (by watching TV, playing basketball, etc.).  By using these two scarce resources, you are choosing to NOT do something else.  This next best alternative you can do, but choose not to, is your opportunity cost.

For example, today I chose to write in this blog instead of playing baseball with my friends.  The opportunity cost of blogging is playing baseball!  If you have two exams tomorrow, and you choose to only study for one class, the better grade you get in the chosen class has the opportunity cost of a better grade in the class you chose not to study for!

We all face opportunity costs with every decision/action we make during the day.  Remember: Opportunity cost is the value of your next best alternative.  Remembering this concept is handy, because later, economists link all opportunity costs to money/dollars so that they can be measured.  Having a firm understanding of this concept (and scarcity), is important for all future lessons in economic theory.