What is Opportunity Cost?
Opportunity cost is the value of the best alternative you give up when you make a choice. Because resources — time, money, labor — are limited, every decision means forgoing something else.
Opportunity cost is the value of the next-best alternative forgone when a choice is made. It applies to every decision, from spending money to choosing how to spend an hour of your day.
- 1↓List your optionsIdentify every realistic alternative use of your time or money.
- 2↓Estimate each valueAssign a rough value (money, time saved, satisfaction) to each option.
- 3↓Pick the best oneChoose the option with the highest expected value to you.
- 4Identify the opportunity costThe value of the next-best option you didn't pick is your opportunity cost.
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Step-by-step worked examples
You have $500. You could invest it for a $50 return, or spend it on a trip worth $500 in enjoyment. If you invest, what's the opportunity cost?
Chosen: invest, gain = $50 Forgone: trip worth $500 in enjoyment Opportunity cost = $500 (the value of the trip you gave up)
A student can work a weekend shift for $120 or study for an exam. If studying raises their expected grade value by $200 (in future scholarship terms), what should they choose?
Chosen (study) value = $200 Forgone (work) value = $120 Net benefit = 200 - 120 = $80 → studying is the better choice
A farmer has 10 acres. Wheat yields $300/acre profit; corn yields $250/acre. If she plants all wheat, what is the opportunity cost per acre?
Value chosen (wheat) = $300/acre Value forgone (corn) = $250/acre Opportunity cost = $250/acre (per acre planted with wheat)
Flashcards
Quick quiz
Q1.What is opportunity cost?
Q2.You choose to watch a movie (worth $20 in enjoyment) instead of working a shift paying $40. Your opportunity cost is:
Q3.Opportunity cost exists because of:
Q4.Which is an example of an implicit opportunity cost?
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Common mistakes
Adding up the value of ALL forgone options. — Correct: Opportunity cost only counts the single BEST forgone alternative, not every option.
Thinking opportunity cost only applies to money. — Correct: It applies to any scarce resource — time, effort, land, etc.
Confusing opportunity cost with sunk cost. — Correct: Sunk costs are already spent and irrelevant to future decisions; opportunity cost is about future forgone value.
Ignoring implicit costs (like your own time). — Correct: Implicit costs count too — your unpaid time has real economic value.
FAQ
What is opportunity cost?
It's the value of the best alternative you give up when you make a choice, given limited resources.
What is the opportunity cost formula?
There's no single numeric formula — it's identified as the value of the next-best forgone alternative; you can compare net benefit as Chosen − Forgone.
What are examples of opportunity cost?
Choosing to study instead of work, planting wheat instead of corn, or spending savings instead of investing them.
How do you calculate opportunity cost?
List your realistic alternatives, estimate the value of each, and the opportunity cost is the value of the best one you didn't choose.