The Real Price of Anything
The opportunity cost of a choice is the value of the next-best alternative you give up by making it. Not all the alternatives — just the best one you actually forgo.
A year of university costs tuition and books — but the biggest line item is invisible: the salary you didn't earn. If you could have made 18,000€ working, that forgone income belongs in the cost of studying.
Key idea: Opportunity cost = the value of the best forgone alternative.
Three sharpening rules:
- Count forgone earnings, not just cash paid. The concert ticket costs 50€ plus the evening of paid work you skipped.
- Don't count what you'd spend anyway. Food during university isn't an opportunity cost of studying — you eat either way.
- Sunk costs are not opportunity costs. Money already spent and unrecoverable has no alternative use left; rational decisions look only forward.
Societies face it too. A government that builds a stadium gives up the schools the same budget could have built. An economy at full employment can only produce more of one thing by producing less of another — the idea the production possibilities frontier will draw in the next lesson.
Economists' quiet slogan: there is no such thing as a free lunch — someone, somewhere, gave up the next-best use of those resources.
What belongs in opportunity cost
| Counts | Does not count |
|---|---|
| Forgone salary while studying | Food you would eat anyway |
| The evening of paid work skipped for a concert | Money already spent and unrecoverable (sunk) |
| The best single alternative forgone | The sum of all alternatives |
Common pitfall: Adding up every alternative you gave up. You could only have done one other thing with the evening — opportunity cost is the value of the best one, not the total of all of them.