A key concept in economics, ‘Opportunity Cost’ is generally defined as the ‘value of the best foregone alternative’. In simpler terms,  it is the cost of the next best choice available to you when you choose from various ‘mutually exclusive choices’.

In economics and especially for economists, the idea of cost is slightly quirky, as for them, the cost of something is not just the monetary value but ‘all’ of the value given up in acquiring that particular thing. Additionally, going by the definition, the cost of something is not just its cash value but is also the value of something that you didn’t get. A simple concept, opportunity cost however has powerful implications. It has been described as expressing the basic relation between scarcity and choice. Opportunity cost is that notion which plays a important part in making sure that there is efficient use of scarce resources.

Lets take the example of Mike, the mailroom clerk in my office who recently decided to quit his job and go back to school. The opportunity cost for him in this case would be the wages he loses for the four years he spends in school getting a degree. On the other hand, if Mike changes his mind and decides to stay, the opportunity cost will be the loss of future increase in his wages that he could have gained if he had a college degree.

Even if opportunity cost considers lots of non-monetary values, we often tend to monetize it, translating the cost in dollar terms for comparison purposes. Taking a look further into Mike’s education we can understand the powerful implications of opportunity cost.

Usually the government heavily subsidizes education; however, Mike will still have to pay more than half the cost of his education. Say, Mike attends a state college and pays an annual tuition fee of $5,000 where the state subsidy is $8000. So with the total tuition is of $13,000, one may say that Mike is paying less than half of his overall tuition fee. However, we haven’t considered the amount of money that Mike will be losing yearly since he won’t be working. Assuming Mike makes approximately $25,000 annually, the actual total cost of his education will be $38,000 yearly; $25,000 in wages lost plus $12,000 total tuition fees. So, Mike is going to pay a hefty price of $30,000 per year for his college degree ($25,000 wages lost plus $5,000 tuition fees). Hence he ends up paying more than 75% of his total educational cost even with a heavy subsidy. This is the reason why student don’t quit college en-mass even if the college raises the tuition fees. For example, if the college increases the tuition fee by 10%, Mike pays just extra $500 which is less than 2% of his total educational cost.

We wont consider the cost of his accommodation and food since he’d be spending on those regardless of whether he is at a job or at college.

The opportunity cost plays an important part while considering the differences between the ‘economic cost’ and ‘accounting cost’ concepts. The assessment of opportunity cost is key to assessing the true cost of any course of action. It should be noted however that it is difficult to compare most of the opportunities. Opportunity cost has been seen as the foundation of the ‘marginal theory of value’ and also the ‘theory of time and money’. Even though, it may be possible, in some cases, to have more of everything by making different choices.