Question

In: Economics

what is opportunity cost?

what is opportunity cost?

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Expert Solution

Opportunity cost is an economic concept that refers to the value of what you have to give up for something else to choose from. Nutshell, it's a commodity not taken from the lane. The idea behind the cost of opportunity is that you, as a business owner, still have limited capital. That is, you've got a finite amount of time, energy, and skills so you can't take advantage of any chance that comes along. If you choose one, then you will automatically give up on others. They exclude each other. The interest of those others is the expense of your chance.

When economists refer to a resource's "opportunity cost," they mean the value of that resource's next-highest-estimated alternative use. If you spend time and money going to a show, for example, you can't spend the time reading a book at home, so you can't spend the money on anything else. If you're reading the book as the next best option to watching the film, then the opportunity cost to watch the film is the money invested plus the enjoyment you lost by not reading the book.

In reality the term "opportunity" in "cost of opportunity" is redundant. The cost of using anything is now the value of the most desired alternative use. Yet redundancy, as contract attorneys and airplane pilots know, can be a virtue. Their virtue in this case is to remind us that the cost of using a resource derives from the value of what it might be used for instead.


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