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Essay on Opportunity Cost
Opportunity cost is a term used in economics, to mean the cost of something in terms of an opportunity foregone (and the benefits that could be received from that opportunity), or the most valuable foregone alternative. For example, if a city decides to build a hospital on vacant land that it owns, the opportunity cost is some other thing that might have been done with the land and construction funds instead.(Fetter,1904)
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. In more personal terms, the opportunity cost of spending a Friday night drinking with your friends could be the amount of money you could have earned if you had devoted that time to working overtime. This does not always mean something of monetary value, just anything that is of any value to the subject in question.
The consideration of opportunity costs is one of the key differences between the concepts of economic cost and accounting cost. In the case where the costs of a course of action are not immediately apparent because there is no explicit accounting or monetary cost (price) attached, there may even be an illusion that its benefits cost nothing at all; this is a hidden cost.
The application of the concept of opportunity cost looks for the hidden cost of any and every individual economic decision. Ignoring opportunity cost can make certain economic decisions produce fallacies such as the broken window fallacy described by Frederic Bastiat. (Frisch,1950) .....
