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 alternatives, just the single best one you actually forgo. Economists call this rule: there is no such thing as a free lunch, because resources always have another use.
A year of university costs tuition, but also the forgone salary you didn't earn while studying. If you could have made 18,000€ working, that lost income is part of the cost.
Key idea: Opportunity cost = the value of the best forgone alternative.
Societies face this too. A government building a stadium gives up the schools that same budget could have built. An economy at full employment must sacrifice one good to produce more of another.
Rules and Pitfalls
Applying opportunity cost requires strict accounting. Follow these rules to avoid bad decisions:
| Counts | Does not count |
|---|---|
| Forgone salary while studying | Food you would eat anyway |
| Best single alternative forgone | The sum of all alternatives |
| Evening of work skipped for a ticket | Sunk costs already spent |
Common pitfall: Adding up every alternative. You could only do one other thing with your time, so opportunity cost is only the value of the best alternative, never the total of all possible options.
Remember that sunk costs are unrecoverable and have no alternative use left. Rational economic decisions look only forward.