Opportunity cost

Glossary definition: The value of the best alternative given up when something is chosen.

In plain words

Every choice means leaving something else. If you spend Saturday morning studying, you do not spend it playing football; if you pay €20 for a book, you do not pay it for the cinema. Opportunity cost is the value of the best alternative given up.

The cost is not the sum of money as such; it is what the chooser himself would otherwise have done with the same means. That is why opportunity cost exists even when nothing is paid: a “free” event costs the time you would have spent elsewhere.

An example

A student has two hours. He can work in a shop for €16 or study for a test. If he studies, the opportunity cost is the €16 (and whatever he would have bought with it); if he works, it is the grade he hoped to earn by studying.

The Austrian viewFor the Austrian School cost is subjective: it is the value of the alternative given up, as the acting person appraises it at the moment of choice. Friedrich von Wieser set out the idea. The same reasoning lies behind Bastiat’s “what is not seen” and Henry Hazlitt’s “one lesson”: the money spent replacing a broken window is the suit that was never bought. The same holds for every government outlay: whatever is paid for with taxes or new money draws resources away from uses that people themselves would have preferred.

In the original“This is the opportunity cost of the firm’s using the product, since it equals the value product that is forgone through failure to use the factor unit elsewhere.”

Murray N. Rothbard, Man, Economy, and State with Power and Market, Chapter 7 — Production: General Pricing of the Factors · 2. Determination of the Discounted Marginal Value Product · mises.org ↗

Definitions are from the site’s Glossary; the examples and the “Austrian view” are Praxeologos’s reading. Links to outside sources open in a new tab.