Opportunity Cost

Opportunity cost is what must be given up to obtain something, meaning all the possible alternatives that must be sacrificed to achieve a goal.

Opportunity Cost is Not Always Obvious

Opportunity cost is not always obvious. For example, when considering the opportunity cost of going to college, we can include the time spent, the value of tuition, the cost of food, the cost of housing, or the amount of money that could have been earned by working full-time or part-time during that period with the goal of earning a higher salary in the future. However, some of these do not qualify as opportunity costs. The cost of food and housing during that time are not opportunity costs of attending college because, whether you attend college or not, you will still need to eat and have a place to live. These would only represent an opportunity cost if attending college results in extra expenses for housing and food, in which case the opportunity cost would be the difference in cost.

Opportunity Cost for Companies

The opportunity cost for a company when it decides to use its capital to produce a specific good includes all the alternative uses for that capital. This encompasses all the alternative goods it could produce or the financial assets it could invest in that might yield an equal or greater return than what is obtained from the production process.