Opportunity cost

Opportunity cost, in microeconomics, is defined as the value of the best possible economic alternative that you reject in order to dedicate your resources to another specific activity. Agents will have to face an opportunity cost in every decision made; therefore, the chosen activity will have to face the lowest possible opportunity cost in order to be chosen as the best option, or the greatest benefits, so it outweighs the opportunity cost. Governments, for example, face an opportunity cost when they decide to allocate their budget in a specific way instead of another e.g. Building schools, hospitals and infrastructures instead of buying military vehicles, weapons and equipment.

The opportunity cost, along with sunk costs, must be taken into consideration every time we make decisions. For instance, if out of only two possible options, A and B, we decide to take A, we must consider not only benefits and costs directly related to A, but also the opportunity cost of not choosing B. The opportunity cost in this case, can be considered as the forgone net benefit of choosing B. This is, the net, actual benefit derived from choosing A will be:

Net BenefitA = BenefitA - CostA - Opportunity CostA = BenefitA - CostA - (Net BenefitB)

 

A real life opportunity cost that many young people face is whether to go to college. In most countries, especially in the US, going to college can be seen as a great investment. However, it is a costly investment. When deciding whether to go to college, young people must not only think about the benefits (higher future income) and costs (tuition fees), but also about the opportunity cost, which corresponds to the money that would have been earned if working had been chosen instead.