Opportunity Cost


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Definitions and Basics

    Opportunity Cost, from the Concise Encyclopedia of Economics
    When economists refer to the "opportunity cost" of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can't spend the money on something else. If your next-best alternative to seeing the movie is reading the book, then the opportunity cost of seeing the movie is the money spent plus the pleasure you forgo by not reading the book....
    Getting the Most Out of Life: The Concept of Opportunity Cost, by Russ Roberts on Econlib
    To get the most out of life, to think like an economist, you have to be know what you're giving up in order to get something else....

    Sometimes people are very happy holding on to the naive view that something is free. We like the idea of a bargain. We don't want to hear about the hidden or non-obvious costs. Thinking about foregone opportunities, the choices we didn't make, can lead to regret. Choosing this college means you can't go to that one. Marrying this person means not marrying that one. Choosing this desert (usually) means missing out on that one....

In the News and Examples

    Opportunity cost, movies, and reading: Tyler Cowen on Your Inner Economist. Podcast on EconTalk, September 10, 2007.
    "Economics is the study of how to get the most out of life." Tyler Cowen, of George Mason University, talks about his new book, Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist. Cowen, legendary blogger at MarginalRevolution.com, talks with EconTalk host Russ Roberts about the economics of parenting, reading, dentistry, art museums and education. Highlights include Tyler's favorite art museum and what to see there along with the challenges of being a tourist in Morocco....
    Biggest cost of college is what students could otherwise earn by working: Human Capital, by Nobel Prize winner Gary Becker in the Concise Encyclopedia of Economics
    Tuition and fees are not, for most college students, the major cost of going to college. On average, three-fourths of the private cost of a college education--the cost borne by the student and the student's family--is the income that college students give up by not working. A good measure of this "opportunity cost" is the income that a newly minted high school graduate could earn by working full-time. During the 1980s and 1990s, this forgone income rose only about 4 percent in real terms. Therefore, even a 67 percent increase in real tuition costs in twenty years translated into an increase of just 20 percent in the average student's total cost of a college education.
    Opportunity cost and TANSTAAFL: Chris Anderson on Free. Podcast on EconTalk, May 12, 2008. Specifically, explanation of the economic meaning of "There ain't no such thing as a free lunch," starting at time mark 47:11.
    Chris Anderson talks with EconTalk host Russ Roberts about his next book project based on the idea that many delightful things in the world are increasingly free--internet-based email with infinite storage, on-line encyclopedias and even podcasts, to name just a few. Why is this trend happening? Is it restricted to the internet? Is there really any such thing as a free lunch? Is free a penny cheaper than a penny or a lot cheaper than that? The conversation also covers whether economics has anything to say about free....
    Opportunity cost, rock concerts, and grades: A Fable of the OC, by Mike Munger on Econlib.
    You get to the box office about midnight, but don't sleep much because it's noisy. Finally, sleep does come. It only seems like a few minutes later when the clank of the ticket window opening wakes you at 8:00 am. In the sunlight, you notice that there are way more people in line than you thought. Thousands, in fact. You may not get tickets, even after camping out...But you start thinking about opportunity cost, the big OC. You recall from economics class that the OC is about foregone alternatives. In other words, the cost of doing one thing is all the other things you don't get to do as a result.... I used this fable (sort of—it was Bruce Springsteen then) as a test question in my intermediate Microeconomics class at Dartmouth College....
    Opportunity cost and crowding out of public projects:
    Public funding of French public works projects is at the expense of other alternative, forgone, and equally worthy projects and goals. See: "The Seen and the Unseen: The Costly Mistake of Ignoring Opportunity Cost", by Anthony de Jasay on Econlib.
    Opportunity Cost and Hidden Inventions, by Dwight Lee. Audio and text from The Freeman at CommonSenseEconomics.com.
    Few people think about opportunity cost as systematically as economists do, but all of us are constantly guided by the opportunity costs we face. If, as you are reading this article, you learn that someone a few blocks away is giving $1,000 to anyone who comes by, I predict with confidence that you will quickly stop reading because of the cost of continuing. Unfortunately, we commonly accept arguments that would make sense only if people ignore the opportunity costs of their decisions....

A Little History: Primary Sources and References

    Early use of the term "opportunity cost": The Theory of Choice and of Exchange, by Frank Knight. Part II, Chapter 3 in Risk, Uncertainty, and Profit
    In spite, therefore, of the purely relative character of pain and pleasure and of the essential parity as motives of all alternatives of conduct, it is pragmatically necessary to distinguish in productive activity between the incoming "economic" utility and the sacrificed (resources, representing) non-economic, unspecified alternatives in general, between utility and disutility, or commodity and cost. "Cost," in this sense, is "pain cost," or "opportunity cost," as one prefers; there is no real difference in meaning between the two.... [par. II.III.33]

Advanced Resources

    Ticket Scalping and Opportunity Cost. EconTalk podcast, April 10, 2006.
    Michael Munger of Duke University and host Russ Roberts talk about the economics of ticket scalping, examining our reactions to free and found goods, gifts, e-Bay, value in use vs. value in exchange, and opportunity costs.

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