Opportunity cost: the basics

In short: Opportunity cost is the value of the best alternative you give up when you choose a particular option. Every decision therefore has a “price”, even when no money changes hands.

In more detail: Because time, money and resources are scarce, every choice rules out other possibilities. The concept helps people make decisions more consciously and is a basic building block of economics.

In detail

• Scarcity as the starting point: Without scarcity there would be no opportunity cost, because you could have everything at once.
• Only the best alternative counts: What is measured is not the sum of all missed options, but only the benefit of the next-best one.
• Everyday example: Someone who spends an evening studying gives up, for example, a part-time shift or meeting friends; that sacrifice is the opportunity cost.
• Time as a cost: Even a free offer can be expensive if it takes a lot of time that could have been used more sensibly elsewhere.
• Businesses: When a firm invests capital in a project, it forgoes the returns that capital could have earned elsewhere.
• Distinction from sunk costs: Money already spent that cannot be recovered should not determine future decisions; only the alternatives that can still be influenced are relevant.
• Government decisions: When the state spends money on one purpose, it is not available for other tasks, which makes political trade-offs necessary.
• Limits of the concept: The value of an alternative can often only be estimated, especially where time, health or quality of life are concerned (angebot-und-nachfrage, komparativer-vorteil-im-aussenhandel).