The Economic Concept of Opportunity Costs

The Economic Concept of Opportunity Costs

The economic concept of opportunity costs is the most fundamental issue of economics as a social science. It explains the decision-making and behavior of economic subjects. Economic subjects are private households, firms and the government as a public household. While explaining opportunity cost, focus on the question: why do people choose to do, consume or even spend time and resources on what they do? How do you make your choices and decisions?

Definition of Opportunity Costs

Opportunity costs are defined as costs incurred by a forgone alternative (opportunity). A foregone opportunity can either be the opportunity to incur costs, the opportunity to gain revenues, earn profits or cause losses. Economic subjects constantly get involved in decision-making processes, where choices have to be made. Take the following examples:

  • Example 1: non-monetary opportunity costs – the reason why a student would attend high school (an institution of education) is determined by the opportunity cost incurred if the student would not attend the school e.g. the impression of the parents about their daughter or son. Such opportunity cost are not measurable in monetary units.
  • Examples 2: mental accounting – whenever you act or choose not to act in certain manner, you are weighing alternative options and therefore intrinsically accounting for cost that would be incurred by alternative mode of behavior.
  • Example 3: relative costs – a job-seeker may prefer a job that pays less, but offers a better work-life balance, at the cost of a better paying job under worse work-life balance.
  • Example 4: Specialization and relative cost/benefit advantage – the opportunity cost of Germany producing autos are the cost incurred for not producing other goods that Germany prefers to import from other countries, e.g. Coffee from Kenya.
What are opportunity costs?
What are opportunity costs? (C) Evansonslabs

Literature

The following Literature will help you to expand the spectrum of knowledge in this Field:

  • Varian, H. R. (2020). Intermediate Microeconomics: A modern approach ; media update (Ninth Edition, International Student Edition). New York, London: WW Norton et Co.

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