Because resources are scarce (Scarcity and the Factors of Production), choosing one thing always means not choosing something else. Economists measure the cost of a choice by what you give up to make it.
Key idea
The opportunity cost of a choice is the value of the next best alternative you give up. It counts money you pay and anything else you sacrifice, such as your time or the wage you could have earned. Only the single best alternative counts, not every alternative added together.
Why it works
Why only the best alternative? With the same evening or the same \$20 you could have done only one other thing. If you hadn't gone to the game, you would have picked the best option left on your list, not all of them at once. So the real sacrifice is that one best option. And why does time count? Because an hour spent one way can't be sold or used another way. When an hour could have earned \$15 at a job, spending it elsewhere costs \$15, even though no money changes hands.
Worked example: Saturday choices
On Saturday afternoon Jen can work a 5-hour shift at \$14 an hour, babysit for \$50, or go to a free street festival. She goes to the festival. What is her opportunity cost?
- List the alternatives she gives up and their values: the shift is worth $5 \times \$14 = \$70$; babysitting is worth \$50.
- She could have done only one of them. The best one is the shift, worth \$70.
- The festival is free, so there is nothing else to add.
Answer: \$70, the value of the best alternative (not \$70 + \$50 = \$120).
Worked example: A concert that costs time and money
Omar buys a \$40 concert ticket. The concert and travel take 3 hours, which he could have spent working at \$12 an hour. What is the opportunity cost of going?
- Money given up: the \$40 ticket, which he could have spent on something else.
- Time given up: 3 hours of work, worth $3 \times \$12 = \$36$.
- Total: $\$40 + \$36 = \$76$.
Answer: \$76.
Common mistake
Two mistakes are common. Adding up every alternative: in Jen's case \$120, as if she could have worked and babysat in the same hours. And leaving out costs that aren't paid in money, such as time or a forgone wage: then Omar's concert looks like it costs only \$40. Studies find that even trained economists sometimes miss forgone earnings. Check: ask "what would I actually have done instead?" and count that one option, money and time together.