Opportunity Cost

In economics, Opportunity cost(economic cost) is the cost of something in terms of an oportunity forgone (and the benefits that could be received from that opportunity), or the most valuable forgone alternative, i.e. the second best alternative.

For Eg: If a city decides to build a hospital on the vacant land that it owns, the opportunity cost is some other thing that might have been done with the land and construction funds instead. In building the hospital, the city has forgone the opportunity to build a sporting center on that land, or a parking lot, or the ability to sell the land to reduce the city's debt, and so on.

Opportunity cost need not be assessed in monetary terms, but rather can be assessed in terms of anything that is of value to the person or persons doing the assessing. For example, a person who chooses to watch, or to record, a television program cannot watch (or record) any other at the same time. (The rule still applies if the recording device can simultaneously record multiple programs; there is going to be a limit, and if the number of desired programs exceeds the capacity of the recorder, some of them will not be saved, and thus cannot be seen.) In any case, at the time the person chooses to watch a program, either live or on a recording, they cannot watch something else, and if they are not able to record another program showing at the same time, the opportunity to view it is lost (presuming the particular program is not repeated). Or another example, someone having a video game can choose to watch a program or play the video game on the TV; they can't do both simultaneously. Whichever one they choose is a lost opportunity to experience the other.

Assessing opportunity costs is fundamental to assessing the true cost of any course of action. In the case where there is no explicit accounting or monetary the land for a parking lot, or the money that could have been made from selling the land, or the loss of any of the various other possible uses -- but not all of these in aggregate, because the land cannot be used for more than one of these purposes.

However, most opportunities are difficult to compare. Opportunity cost has been seen as the foundation of the marginal theory of the value.

Pitfalls in the calculation of Opportunity Costs: Hidden Costs

One has to be careful in calculating the opportunity cost of any course of action. There are two pitfalls in the way of such a calculation: some relevant costs may be ignored in the calculation or some costs that should not be included may be included. For example: Sunk Costs should not be included in opportunity costs because once that cost is incurred, sunk costs are not part of the firm's alternatives because they cannot be put to alternative use.

In a brief summary, an opportunity cost is the benefit lost from making one choice over another.