Opportunity cost

Opportunity cost is a term used in economics, to mean the cost of something in terms of an opportunity foregone (and the benefits that could be received from that opportunity), or the most valuable foregone alternative. For example, if a city decides to build a hospital on vacant land that it owns, the opportunity cost is some other thing that might have been done with the land and construction funds instead. In building the hospital, the city has foregone the opportunity to build a sporting center on that land, or a parking lot, or the ability to sell the land to reduce the city's debt, and so on. In more personal terms, the opportunity cost of spending a Friday night drinking with your friends could be the amount of money you could have earned if you had devoted that time to working overtime.

Related Topics:
Economics - Cost - City - Hospital - Debt

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Opportunity cost need not be assessed in monetary terms, but rather, is assessed in terms of anything that is of value to the person or persons doing the assessing. The consideration of opportunity costs is one of the key differences between the concepts of economic cost and accounting cost. Assessing opportunity costs is fundamental to assessing the true cost of any course of action. In the case where there is no explicit accounting or monetary cost (price) attached to a course of action, ignoring opportunity costs may produce the illusion that its benefits cost nothing at all. The unseen opportunity costs then become the hidden costs of that course of action.

Related Topics:
Accounting cost - Price

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The application of the concept of opportunity cost looks for the hidden cost of any and every individual economic decision. Ignorance of the economic concept of opportunity cost has produced common economic fallacies, such as the broken window fallacy described by Frederic Bastiat.

Related Topics:
Broken window fallacy - Frederic Bastiat

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