Because resources are scarce, people must make choices. A choice is a comparison of alternatives. Every choice has an opportunity cost. Opportunity cost is the value of the next best alternative. For example, suppose I had a choice of having oatmeal, Wheat Chex, or Raisin Bran for breakfast. Since I chose Raisin Bran, my opportunity cost is oatmeal or the Wheat Chex, whichever I most prefer.
For an accountant, the cost of an activity is the out-of-pocket expenses, all of the money paid to undertake the activity. For an economist, the cost of an activity is everything given up for it, including opportunity costs. For example, what are the total costs of a college education?
| tuition | $56,000 |
| books | 4,000 |
| living expenses | 14,000 |
| transportation | 2,400 |
| opportunity costs | 60,000 |
| total costs | $136,400 |
Instead of attending college you could be doing something else such as working or backpacking across Europe. That something has a value to you; the value of whatever you would have done if you had not attended college is the opportunity cost of going to college.
Let's say you would have found a job at Sheetz and would have made $15,000 a year. Then, your opportunity cost of attending college would be the wages you could have earned instead: $15,000 a year for 4 years is $60,000.
