Whenever a choice is made, something is given up. Opportunity cost values an economic resource as the value of its next highest valued alternative use. It is normally expressed in terms of a relative price. For example, if a shipwrecked sailor can catch 10 fish or harvest 5 coconuts per day. The opportunity cost of producing one coconut is two fish.
Opportunity cost is useful when the costs and benefits of choices vary. By expressing one option in terms of foregone benefits of another, marginal costs and benefits of each option can be compared. Sometimes these costs and benefits are not reflected in the price we pay for goods or services.
Is the value of the next best thing what you really give up? Opportunity cost is such a fundamental concept in economics as well as everyday life.
Can we make better decisions without it?
This Micro Brief is part of an ongoing series provided by Lytton Advisory as a general public information service. These concepts underpin modern economic analysis. Find out more about smarter capital investment decisions using economics at www.lyttonadvisory.com.au.