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Definition and Example:

Opportunity cost is the sacrifice, or forgone alternatives, in choosing to satisfy one need or want rather than another.

Every time a decision is made about production, distribution or consumption, there is a cost. However, economists use the term cost in a special sense. The opportunity cost is the economic consequence of any decision that highlights the nature of scarcity and choice.

For example, assume you had $100 and spent it on dinner for two at a restaurant. To an accountant, the cost of the meal would be $100. To an economist, the cost is everything else you can no longer buy with that $100 because you spent it at a restaurant.

The opportunity cost of the dinner was several CDs, reducing your credit card bill, enrolling in a short course, seeing ten films, a big night out at a nightclub with friends, saving the money, buying books, new clothes, going to the dentist or donating to charity.

This example the concepts of scarcity (the limited amount of money), the need to make a choice, and the costs associated with the choice made. Every day such choices are made. How to get to college, you could drive, ride a bike, walk or catch public transport. Do you take lunch, buy it or go without? And if you buy it, what do you buy from the range of choices available?

Another example is a large tract of the forest; should it be conserved or logged? The opportunity cost of conservation is potential export income, the loss of timber workers’ jobs, processed timber for housing, the use of cleared land for sporting fields etc. The opportunity potentially endangering native species of flora and fauna.