What is Opportunity Cost?

Opportunity cost of any commodity is the next best alternative commodity that is sacrificed. For example, the factors of production which are used for the manufacture of a car might have been used for production of machinery. Hence the opportunity cost of production of a car is the output of machinery which could have been produced with the same amount of factors but has not been produced. Thus opportunity cost of anything is the alternative that has been foregone.

When a person decides to work overtime for extra money, the cost of the thing which he buys with the extra money is the leisure which he has given up. A farmer who is producing wheat can also produce potatoes with the same factors. The opportunity cost of wheat is the output of potatoes given up.

According to Professor Marshall, "The real ultimate cost of anything is the loss of that alternative which must be sacrificed when resources of any kind are devoted to a particular object."

It follows that what labour would get in one employment would depend on what it can get elsewhere, what rate of interest capital would be entitled in one industry would depend on what it can earn. In this way, actual cost is the cost of the displaced alternative. The cost of producing a thing would be determined by the value of the thing that has not been produced, but could have been produced by the same factors of production.

According to Professor Benham, "The opportunity cost of anything is the next best alternative that could be produced instead by the same factors or by an equivalent group of factors, costing the same amount of money."