Opportunity Cost

Opportunity cost refers to the value of the next best alternative that could have been made when making a decision. Unlimited human wants combined with scarce resources compel individuals and societies to make choices every day that involve trade-offs; choosing one option can limit the “opportunity” of choosing another. Opportunity cost is linked to this choice.

Decision making involves cost-benefit analysis. Decisions made by individuals and societies have costs and benefits that include monetary (out-of-pocket or explicit) and/or nonmonetary (implicit) components. For example, given that there are only 24 hours in a day, the decision to go to a movie instead of studying for an exam involves not only the explicit cost of the movie ticket but also the implicit cost of the time spent not ...