Opportunity costs

Opportunity Cost

Value of the next-best alternative lost when making a decision.

Example of Opportunity Cost for Individuals

Choosing to sleep instead of attending Economics class results in the opportunity cost of missed learning.

Identify Opportunity Cost

To identify opportunity cost, consider limited resources, the first option chosen, and the value of the next-best alternative.

Mnemonic for Identifying Opportunity Cost

Resources, Option Chosen, Alternative Lost.

Opportunity Cost for Firms

The potential loss incurred when a firm chooses one option over another due to limited resources.

Example of Opportunity Cost for Firms

Producing small cars instead of large cars incurs the opportunity cost of the profit from large cars.

Opportunity Cost Rule

If the benefit of the first option is greater than the opportunity cost of the second-best option, then it is the best choice.