What Is Opportunity Cost?
The concept of opportunity cost is one of the most important in economics, therefore it is worthwhile revisiting the definition. So, what is opportunity cost?
The opportunity cost of something is the value of everything you have to give up to buy it. For an activity it is the value of everything you have to give up to pursue that activity.
I recently read a good example in The Economic Naturalist: Why Economics Explains Almost Everything. As I have just linked to the book I am sure the author won’t mind me quoting from his example.
Suppose you won a free ticket to see an Eric Clapton concert tonight. You can’t resell it. Bob Dylan is performing on the same night and his concert is the only other activity you are considering. A Dylan ticket costs $40 and on any given day you would be willing to pay as much as $50 to see him perform. (In other words, if Dylan tickets sold for more that $50, you would pass on the opportunity to see him even if you had nothing else to do.) There is no other cost of seeing either performer. What is your opportunity cost of attending the Clapton concert?
The only thing of value that you must sacrifice to attend the Clapton concert is seeing the Dylan concert. By not attending the Dylan concert, you miss out on a performance that would have been worth $50 to you, but you also avoid having to spend $40 for the Dylan ticket.
So the value of what you give up by not seeing him is $50 – $40 = $10. If seeing the Clapton is worth at least $10 to you, then you should attend his concert. Otherwise you should see Dylan.