Opportunity cost
Although
opportunity cost can be
hard to quantify, the effect of opportunity cost is universal and very real on the individual
level. In fact, this principle applies to all decisions, not just economic ones.
Since the work of the Austrian economist Friedrich von Wieser, opportunity
cost has been seen as the foundation of the marginal theory of value.
Opportunity
cost is one way to measure the cost of something. Rather than merely identifying and
adding the costs of a project, one may also identify the next best
alternative way to spend the same amount of money. The foregone profit of this
next best alternative is the opportunity cost of the original choice.
A
common example is a farmer that chooses to farm his land
rather than rent
it to neighbors, wherein the opportunity cost is the forgone
profit from
renting. In this case, the farmer may expect to generate more
profit himself.
Similarly,
the opportunity cost of attending university is the lost wages
a student
could have earned in the workforce, rather than the cost of
tuition,
books, and other requisite items (whose sum makes up the total
cost of
attendance). The opportunity cost of a vacation in the Bahamas
might be the
down payment money for a house.
Note
that opportunity cost is not the sum of the available
alternatives, but
rather the benefit of the single, best alternative. Possible
opportunity costs of the city's decision to build the hospital on its
vacant land are the loss of the land for a sporting center, or the inability to use
the land for a parking lot, or the money that could have been made from selling the
land, or the loss of any of the various other possible uses—but not all
of these in aggregate. The true opportunity cost would be the forgone profit of
the most lucrative of those listed.