Is opportunity cost always measured in money?

No. While money is an easy way to measure value, opportunity cost can be measured in time, happiness, health, or whatever metric is most relevant to the alternative you gave up.

What are sunk costs, and do they count?

Sunk costs are expenses that have already been paid and cannot be recovered, like a non-refundable deposit. Because you cannot get that money back regardless of your choice, sunk costs are never included in opportunity cost.

Does opportunity cost apply to free things?

Yes! Even if a concert is entirely free to attend, going to it still takes time. The opportunity cost would be whatever else you could have done with that time, such as working, studying, or sleeping.

What is opportunity cost, with an example?

Every time you make a choice, you have to leave something else behind. Opportunity cost is the value of the next best alternative that you give up when you make a decision.

In economics, we assume resources like time, money, and materials are scarce. Because we cannot have absolutely everything, the true cost of any choice is not just the money you pay for it, but the greatest benefit you missed out on by making that choice.

The everyday analogy

Imagine you have a free evening. You can either study for an upcoming math test, or go to the movies with your friends. If you choose to go to the movies, your opportunity cost is the better grade you might have earned by studying. You gave up the study time to enjoy the film.

Why it works in economics

Economists use opportunity cost to understand how individuals and businesses allocate their scarce resources. Because money, labor, and time are limited, every decision requires a trade-off. By calculating the opportunity cost, businesses can decide which investments will yield the most benefit compared to what they are giving up.

Where students slip up

The most common mistake is thinking opportunity cost includes absolutely everything you gave up. It does not. Opportunity cost is only the value of the single next best alternative. If you have five options and choose the first, your opportunity cost is only the value of the second-best option, not options two through five combined.

Worked through

You have a free afternoon and $40. You can either buy a ticket to a local music festival for$ 40, or you can pick up a 4-hour shift at your part-time job, which pays $15 per hour. If you choose to go to the festival, what is your opportunity cost?

First, look at the out-of-pocket cost: you spend $40 on the festival ticket.

Second, look at the forgone alternative: by going to the festival, you give up the chance to work. Working for 4 hours at $15 per hour would have earned you$ 60.

Your total opportunity cost is the out-of-pocket cost plus the forgone earnings: $40 +$ 60 = $100. The true economic cost of attending the festival is$ 100.

Questions students ask

Ask about this topic

Explain at

Where this comes from: OpenStax Principles of Microeconomics, Chapter 2: Choice in a World of Scarcity · Khan Academy: Basic Economic Concepts, Opportunity Cost and the PPC