Opportunity cost is the value of the next best thing you give up whenever you make a decision. The idea of an opportunity cost was first begun by John Stuart Mill. The utility has to be more than the opportunity cost for it to be a good choice in economics.
In other words, opportunity cost is how much leisure time we give up to work. Because leisure and income are both valued, we have to decide whether to work, or do what we want. Going to work implies more income but less leisure. Staying at home is more leisure yet less income.
Another example is deciding to stop work to go back to university. By choosing to go to university, your opportunity cost is losing your job and your pay check. Even though going back to university has a big opportunity cost, many people think it is a good decision because increased education gives you more job opportunities.
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References[change | change source]
- McConnell, Campbell; Stanley L. Brue (2005). Microeconomics: Principles, Problems, and Policies. McGraw-Hill Professional. pp. 27. ISBN 0072875615. http://books.google.com/books?id=hlwqualKNjEC&printsec=frontcover#PPA27,M1.
- Stigler, George S., "The Nature and Role of Originality in Scientific Progress." Economica, Vol. XXII (November, 1955)