Life is full of choices. Because resources are scarce, we are constantly deciding which good we want to buy or which activity we will pursue. Should we go to movie or read a book? Should we take a vacation or get some extra work done? Should we take a year off from college to travel or try out a job? in each of these cases, making a choice in a world of scarcity requires us to give up alternative activities, in effect costing Ut the opportunity to do something else. That alternative forgone is called the opportunity cost.
To take a simple example, say that, after necessary expenses, your income is $100. With that sum you can either take a trip to Chicago or buy a radio. If you decide to go to Chicago, economists would say that the opportunity cost of your trip was the pleasure of enjoying the new radio.
The concept of opportunity cost can also be illustrated using the production-possibility frontier. Look back at the frontier in Figure 2-2 on page 28. Suppose the country has decided to step up its purchases of guns from 9000 guns at D to 12,000 guns at C. What is the opportunity cost of this decision? You might calculate it in dollar terms, but on the most fundamental level, the cost is the alternative butter that must be given up to produce the extra guns. In this example the Opportunity cost of the 3000 guns is easily seen to be 1 million pounds of butter.
The opportunity cost of a decision arises because choosing one thing in a world of scarcity means giving up something else. The opportunity cost is the value of the good or service forgone.
The concept of opportunity cost is a useful reminder that the actual dollar outlays are not always an accurate index of true costs. For example, if the government decides to run a highway through a national park, the needed land might look cheap in out-of-pocket or budget costs, but the opportunity cost of paving over the park would be paid when people enjoyed fewer picnics or hikes or camping trips.
Another important example of opportunity cost is the cost of going to college. If you went to a public university, you might calculate the total costs of tuition, room, board, books, and travel to be about $9000 in 1989. Does this mean that $9000 is the opportunity cost of going to school? Definitely not! You must include as well the opportunity cost of the time spent studying and going to classes. A full-time job for a 20-year-old high school graduate would on average pay around $15,000 in 1989. If we add up both the actual expenses and the earnings forgone, we find the opportunity cost of college was $24,000 (equal to $9000 + $15,000) rather than $9000 per year.
In the end, the opportunity cost concept reinforces the point made by the no-free-lunch doctrine. Often, the real costs of our actions-whether going to college or building roads or increasing military outlays---~ are subtle and go far beyond the actual dollar outlays. This central lesson of economics-to look to the genuine costs of our decisions-will reappear again and again in the chapters that follow.