Principles of Economics/Opportunity costs

Opportunity Costs

The opportunity cost of a good or of performing an action, also known as the greatest cost, is the increase in one's happiness that results from obtaining a good or undertaking that action rather than obtaining the next-best good or next-best action. If A gives one twice as much pleasure as B, and there is no C that gives more pleasure than B and is comparable (such as uses the time, effort, or other resource), then A's opportunity cost is the benefit of B because that is the difference in resulting happiness. In this particular scenario, the opportunity cost of A is not a good indicator of its value, because it says that A is worth only as much as B, which is not the case.

Normally, there would be many alternate uses for the resources of A/B, so that there would not be such a notable difference, and so A and B would be similar in benefits, B and C would be similar in benefits, etc. In such a case where the differences are minor, the opportunity cost of A would be similar to that of B, and that would reflect their similar benefits.

Oftentimes, opportunity cost is seen as what one would have to give up for something else:

Opportunity cost of A (in terms of B) = $-\frac{\mathrm{\Delta }B}{\mathrm{\Delta }A=1}$

where

• $\mathrm{\Delta }A$ is the gain of marginal utility because of a gain of A = 1
• $\mathrm{\Delta }B$ is the loss of marginal utility because of a loss of B

Opportunity costs can also be thought of as the resources lost, or alternate products forgone, through taking a particular action or producing a certain product. The lost resources could be time, effort, money, goods, etc.