opportunitycost

Opportunity cost is the value of the next best alternative that must be forgone as a result of a decision. It arises from scarcity and the fact that resources are limited. The concept encompasses both explicit costs (out-of-pocket payments) and implicit costs (the value of foregone opportunities such as time or wages). The opportunity cost of a choice is the benefit that could have been received from the best alternative use of those resources.

Examples illustrate the idea. A student who spends evenings studying for an exam instead of working a part-time job incurs the opportunity cost of lost wages. A farmer who allocates land to corn rather than soybeans faces the opportunity cost of potentially higher revenue from soybeans. In production, movement along a production possibility frontier illustrates opportunity costs—the slope shows the amount of one good that must be forgone to produce more of the other.

Measurement and limitations are common challenges. Opportunity costs are not always directly observable and must be estimated, often requiring subjective judgment. Some values are intangible or future-oriented, making quantification difficult. Sunk costs are not included because they cannot be recovered.

Applications are widespread in personal finance, business decision-making, and public policy. Cost-benefit analyses often incorporate opportunity costs to compare alternatives. Critics note that opportunity cost analysis can be sensitive to assumptions and may bias decisions if all foregone benefits are not adequately identified.

Origin: the term is associated with Friedrich von Wieser, who formalized the idea in the late 19th century.