4. Every Choice Has a Price: Opportunity Cost

The “Next Best Thing” You Give Up

Whenever you make a choice, you automatically create two things: a benefit and a cost. The opportunity benefit is what you gain from your decision, while the opportunity cost is what you had to give up. Economics is all about weighing these two sides.

Opportunity Cost is the value of the next best alternative that is given up when a choice is made. Importantly, there can only be one opportunity cost for any decision.

Let’s walk through a clear example to make this concrete:

1. The Scenario: You have $500 to spend at the mall. You see three items you want, each costing $500: a stereo, a jacket, and a TV.
2. Your Ranking: You can’t buy them all, so you rank your choices by preference:
   • 1st Choice: The stereo
   • 2nd Choice: The jacket
   • 3rd Choice: The TV
3. The Decision, the Benefit, & The Cost: You decide to buy the stereo.
   • The opportunity benefit is the satisfaction and use you get from the new stereo.
   • What did you give up? You gave up the jacket and the TV. However, the opportunity cost is only the jacket. Why? Because the jacket was your next best alternative.

It is critical to remember that the opportunity cost is not the jacket and the TV combined. It is only the single “next best thing” you had to forgo to get what you wanted most.

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