In common language, we usually use the word "cost" which simply means, if you want to buy something, you have to pay money for that particular goods or service. But in the terminology of economics, Economists use "opportunity cost". An opportunity cost is the cost of a foregone opportunity.
What Is Opportunity Cost?
According to the economist, opportunity cost refers to
the value of the next-highest-valued alternative use of a resource. In other
words, Opportunity Cost is the value of what is forgone in order to have
something else.
For example, if you've spent your time watching a TV
series, you can't spend that time reading a book. If your next best option for
watching a TV series is reading a book, then the opportunity cost of watching a
TV series is the pleasure you miss by not reading the book. For you, watching a
TV series is more important than reading a book.
In Mathematical Terms:
Opportunity Cost = Return on Forgone Resource – Return
on Chosen Resource.
Opportunity cost plays an important role in the
determination of PPF as a country will decide how to best allocate its
resources according to its opportunity cost.
Real-Life Examples
We cannot have everything we want in life. Our unlimited
needs are faced by a limited supply of goods and services. This generates the
concept of opportunity cost.
Assume a person has a choice between two telephone
services. If he has to buy the most expensive services, he has to reduce the
number of times he goes to the movies every month. Leaving these opportunities
to go to the movies can cost this person too much, forcing them to choose a
less expensive service.
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