Opportunity Cost

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Definition of Opportunity Cost:

Opportunity cost is the cost of the next best alternative that is given up when a different alternative is chosen. It is the most valued trade-off.

Detailed Explanation:

Economists assume that people weigh the opportunity costs of a decision and choose the decision that is "best" for them. The profit motive is the incentive for businesses to strive to maximize their profits. Higher profits generally result in higher income and greater wealth. Economists assume businesses will maximize their profits by producing goods and services efficiently.  What was the opportunity cost of LeBron James’ decision to play professional basketball rather than attend college? Was that opportunity greater than the cost for most high school students? In high school, LeBron was one of the most sought-after basketball recruits. Professional teams crave players of his exceptional ability. He received the top choice in the National Basketball Association’s draft in 2003 right out of high school. 

There are opportunity costs that are not monetary. For example, assume Jane is a teenage babysitter. Several options could influence Jane’s decision regarding how many hours she will babysit. Perhaps she has an opportunity to take a job that will look great on her college application. The benefit of increasing the probability of acceptance to the college of her choice may prompt Jane to take the new job even if her compensation is less and her hours are more restrictive. If Jane chooses to take the job, she would spend fewer hours babysitting, causing a shift to the left of the supply curve. Perhaps most of her friends are gone for the summer. In this case, Jane would rather not spend her nights at home by herself, so she decides to spend more nights babysitting. Her supply curve would shift to the right. The next best opportunity is Jane's opportunity cost. Her opportunity cost will rise significantly after she graduates from college and has many job offers at higher wages. These opportunities will probably sway her to discontinue her babysitting service.

Here is a brief video discussing the Opportunity Cost of going to college.

Click to open the Scarcity and Budgeting exercise used in the video.

Dig Deeper With These Free Lessons:

Economics – Managing Our Scarce Resources
Opportunity Cost – The Cost of Every Decision
Marginal Analysis – How Decisions Are Made
Production Possibility Frontier
Changes in Supply – When Producer Costs Change

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