Opportunity Costs:

Opportunity costs refer to the forgone benefits of the next best alternative, or in other words the highest valued alternative that must be foregone when a choice is made. Opportunity costs are a part of every decision and activity. For instance the opportunity cost of attending college is working full time or travelling round the world. Each choice means giving up something else. A measure of opportunity cost is relative price.  Opportunity cost is the result of trade-offs which is the result of scarcity.

Opportunity cost is the cost we pay when we give up something to get something else. There can be many alternatives that we give up to get something else, but the opportunity cost of a decision is the most desirable alternative we give up to get what we want.

The concept of opportunity cost has several applications, which include:

• Consumer choice
• Production possibilities
• Cost of capital
• Time management
• Career choice
• Analysis of comparative advantage

Opportunity cost is expressed in terms of relative price, that is, the price of one choice relative to the price of another.  Opportunity cost contrast to accounting cost in that accounting cost do not consider foregone opportunities. Opportunity costs do not measure all possible alternatives, just the second best one. So in order to make the best decisions possible, it is necessary to compare the benefits of anything obtained to the costs of obtaining them. This can be done through marginal analysis.

Opportunity cost is therefore the value of the highest-valued alternative that must be forgone when a choice is made. It is the evaluation of a trade-off. Marginal benefits and costs are the benefits and opportunity costs associated with one additional unit of the good. A production possibility curve is used to illustrate opportunity cost. By specializing in activities in which opportunity costs are lowest and then trading, each country or individual will end up with more than if each tried to produce everything.