Opportunity cost

Since resources are limited, every time you make a choice about how to use them, you are also choosing to give up other options.

opportunity cost

The term opportunity cost describes what must be given up to obtain something that’s desired. A fundamental principle of economics is that every choice has an opportunity cost.

If you skip your economics class to do something else, the opportunity cost is the learning that you miss. If you spend your income on video games, then you cannot spend it on movies. If two classes that you want to take are scheduled to meet at the same time, you will only be able to select one. In short, opportunity cost is all around us.

The idea behind opportunity cost is that the cost of one item is the lost opportunity to do or consume something else. Since people must choose, they inevitably face trade-offs in which they have to give up things that they desire in order to get other things that they desire more.

Individual Decisions

In some cases, recognizing the opportunity cost can alter personal behavior. Imagine, for example, that you spend $8 on lunch every day at work. You may know perfectly well that bringing lunch from home would cost only $3 a day, so the opportunity cost of buying lunch at the restaurant is $5 each day (that is, the $8 that buying lunch costs minus the $3 your lunch from home would cost). Five dollars each day does not seem to be that much. However, if you project what that adds up to in a year—250 workdays a year × $5 per day equals $1,250—it’s the cost, perhaps, of a vacation. If the opportunity cost were described as “a nice vacation” instead of “$5 a day,” then you might make different choices.

Societal Decisions

Opportunity cost also comes into play with societal decisions. Universal health care would be nice, but the opportunity cost of such a decision would be less housing, environmental protection, or national defense. These trade-offs also arise with government policies. For example, Florida enacted Alyssa’s Law, named after one of the victims of the shooting that took place at Marjorie Stoneman Douglas High School. The law requires all public and charter schools to use a mobile panic alert system so that any employee can easily trigger an alarm from anywhere in a school in case of an emergency. The government set aside $6.4 million to pay for these systems.^[1]

The opportunity cost of that decision includes all the other things that the money could have been spent on, along with the intangible benefits of those options. In 2022, the average salary of a Florida public school teacher was $47,000.^[2] Rather than allocating the money towards security, the state government could instead choose to direct the money towards the salaries of additional teachers so that students would benefit from smaller class sizes or the money could have been diverted away from education to other public concerns such as job training or poverty. Each decision, no matter the reasons behind it, has an opportunity cost.

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