Opportunity Cost

Opportunity cost is a manner of costs expressed as alternatives as given up, rather than in terms of money. If some courses of action is adopted, there are typically many alternatives that could have been satisfied instead. For example: ones the government has decided on it's total spending for any given year, this provides it with an aggregate resources constraint and it must then decide how to allocate that spending between various competing parts of the public sector, such as health, education and the police. So it could be, for example, that if the government decides that it wants ti hire 1000 extra police it will have to reduce spending on education and 900 teachers can be afforded to obtain 1000 police service. So the opportunity cost of 1000 police would be 900 teachers.

Of course it would not necessarily have to be the education budget that will be cut. It could have been the health budget or the defense budget or some other of the public sector. Indeed, it might be a little bit cut off all the other spending components. The point is that, for any given aggregate resources constraint, if you want more of one thing you have to give up some of the other thing else. The other thing else given up is the opportunity cost of what is obtained.

Opportunity cost is also defined as the next best alternative forgone. As resources are scarce, choices must be made as to what produce and consume. When making choice, the producer or consumer has to do without, or, forgo, some or service or course of action. The opportunity cost of the car is the sector the consumer has to forgo. He has to sacrifice the motorcycle. In doing without it, he bears a cost, an opportunity cost.

Economists also deal with another cost concept, money cost. This involves what was actually paid for the inputs used to produce a given good or service. For instance, a garment factory produces a T-shirt. The money cost of the T-shirt is the actual cost of the fabric and the labor, among other inputs, used to produce the T-shirt.

In summery, opportunity cost highlights the choice that must be made by measuring the cost of anything that is chosen in terms of the alternative that could have been chosen instead.