Opportunity Cost: The Real Cost of Something Is What You Must Give Up to Get It

Jul.05, 2007 in Market Outlook

It is the last term before you graduate, and your class schedule allows you to take only one elective. There are two, however, that you would really like to take: History of Jazz and Beginning Tennis.
Suppose you decide to take the History of Jazz course. What’s the cost of that decision? It is the fact that you can’t take Beginning Tennis. Economists call that kind of cost-what you must forgo in order to get something you want-the opportunity cost of that item. So the opportunity cost of the History of Jazz class is the enjoyment you would have derived from the Beginning Tennis class.

The concept of opportunity cost is crucial to understanding individual choice because, in the end, all costs are opportunity costs. Sometimes critics claim that economists are concerned only with costs and benefits that can be measured in dollars and cents. But that is not true. Much economic analysis involves cases like our elective course example, where it costs no extra tuition to take one elective course-opportunity cost-the other deirable elective course that you must forgo because your limited time permits taking only one.

You might hink that opportunity cost is an add-on-that is, something additional to the monetary cost of an item. Suppose that an elective class costs additional tuition of $750; now there is a monetary cost to taking History of Jazz. Is the opportunity cost of taking that course somethign separate from that monetary cost?

Well, consider two cases. First, suppose that takingBeginning Tennis also costs $750; In this case, you would have to spend that $750 no matter which class you take. So what you give up to take the History of Jazz class is tstill the Beginning Tennis class, period-you would have to spend that $750 either way. But suppose there isn’t any fee for the tennis class. In that case, what you give up to take the Jazz calss is the tennis class plus whatever you would have bought with the $750.

Eight way, the cost of taking your preferred class is what you must give up toget it. All costs are ultimately opportunity costs.

Sometimes the money you have to pay for something is good indication of its opportunity cost. But many times it is not. One very important example of how poorly monetary cost can indicate opportunity cost is the cost of attending college.

Written by Paul Krugman

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