What is Opportunity Cost?
- Whenever you make a decision in an economy, the alternative options you don't pick are called trade-offs.
- However, some trade-offs are better than others. The second best alternative is called the opportunity cost.
- Therefore opportunity cost is the option you must give up when making a decision.
- Economic goods are scarce and all have an opportunity cost.
In Practice
- Opportunity costs can be seen everywhere in economics. For example for a state deciding how to structure its resource allocation, a firm deciding how to price products or a government deciding whether or not to apply a tax or subsidy.
- Each choice comes with its own positives and drawbacks. We generally pick the chopice with the least drawbacks.