Opportunity cost is the value of the next best thing you gave up. It is not the money you spent. It is what else you could have done with the time, money, or resources. Choosing to study for an exam means giving up an evening with friends. The value of that evening is part of the cost.

Economists treat opportunity cost as the true cost of any decision. A company that invests in a new factory forgoes the returns it could have earned elsewhere. A government that spends on a highway forgoes spending on hospitals. Every choice has a shadow price.

The concept is simple but easy to ignore. People focus on out-of-pocket costs and forget the alternatives. That leads to poor decisions. A free concert is not free if you skip work to attend. A cheap flight is not cheap if it takes two days of travel.

Examples

• Time spent studying vs. working
• Money invested vs. spent
• Land used for farming vs. housing
• Leisure vs. overtime pay
• Public spending priorities