Opportunity cost

An unpleasant fact of economics is that the choice to do one thing is, at the same time, a choice not to do something else. Your choice to spend time reading this blog is a choice not to spend the time playing video games, listening to a math lecture, or going to a party. These things must be given up because you decided to read this lob instead. As we indicated in earlier posts, the highest valued alternative sacrificed in order to choose an option is called the opportunity cost of that choice. In economics when we refer to the “cost” of an action, we are referring to its opportunity cost.
Opportunity costs are subjective because they depend upon how the decision maker values his or her options. They are also based on the expectations of the decision maker- what he or she expects the value of the forgone alternatives will be. Because of this, opportunity cost can never be directly measured by someone other than the decision maker. Only the person choosing can know the value of what is given up. This makes it difficult for someone other than the decision maker-including experts and elected officials-to make choices on that person’s behalf. Moreover, not only do people differ in the trade-offs they prefer to make, but their preferences also change with time and circumstances. Thus, the decision maker is the only person who can properly evaluate the options and decide which is the best, given his or her preferences and current circumstances.
Monetary costs can be measured objectively in terms of dollars and cents (or yen, lira, and so forth). They also represent an opportunity cost. If you spend $20 on a new CD, you must now forgo the other items you could have purchased with the $20-a new shirt, for example. However, it is important to recognize that monetary costs do not represent the total opportunity cost of an option. The total cost of attending a football game, for example, is the highest valued opportunity lost as a result of both the time you spend at the game and the amount of money you pay for your ticket. In cases like the purchase of a CD, where there is minimal outlay of time, effort, and other resources to make the purchase, the monetary cost will approximate the total cost. Contrast this with a decision to sit on your sofa and listen to your new CD, which involves little or no monetary cost, but has a clear opportunity cost of your time. In this second case, the monetary cost is a poor measure of the total cost.