Talk:Opportunity cost/Archives/2012

amalgamated definition

This article has gone from having two explicitly separated definitions of opportunity cost

1. the next best opportunity available
2. the sum of all the other opportunities available

to having an amalgamation of these two. Unfortunately, I think this is misleading. The two definitions are not transparently equivalent. Perhaps they are equivalent in some sense, but, if so, this should be argued explicitly in the article. --Ryguasu 00:30 Feb 3, 2003 (UTC)

I think you're misunderstanding what Dawkins said. When he said "sum of all the other things that you have to forgo" he is referring to the "next best opportunity available".

So, for example, the next best alternative to going on a year long vacation might be to stay at home, keep earning money, buy a new house and a new car etc. To find the opportunity cost you would add together the all the things you forgo - the the house, the car, etc. That's what Dawkins means by the sum of things you forgo - he is still referring to the single "next best opportunity available".

Opportunity cost is equal to the value of the next best alternative, not the sum of all available alternatives (which may be infinite). --lk (talk) 18:49, 21 November 2007 (UTC)

Tannin's edit is a real improvement, I think the article now does a reasonable job of explaining it. Enchanter 13:42 Feb 3, 2003 (UTC)

I think that the first sentence is misleading: The beginning "Opportunity cost is the next-best choice available [...]" states that opportunity cost is a choice, rather than some value (be it money, goods, services, consume, etc). I think that this is wrong. I think instead that choices can lead to opportunity costs, but choices themselves are not costs. An opportunity cost is always some value and not a choice. E.g. "eating chocolate" is a value (that you forgo when buying ice cream instead of chocolate, thus can be an opportunity cost). Another example for a value is "10 cents", e.g. if chocolate costs 10c less than ice cream (and you buy ice cream, so you couldn't save 10c, thus one of your opportunity costs is "10c"). But e.g. "to buy ice cream instead of chocolate" is a choice and not a value. —Preceding unsigned comment added by 217.110.231.246 (talk) 10:45, 24 June 2010 (UTC)

Incorrect graph

The graph contradicts the text.

who put i agree with him or her??? whoever it was is pretty stupid — Preceding unsigned comment added by 71.89.152.77 (talk) 18:06, 25 January 2012 (UTC)

Economic cost

I feel like I've heard "economic cost" used differently, but can't recall it for the life of me. Leave as is for now. [[User:Meelar|Meelar (talk)]] 22:23, 28 Jun 2004 (UTC)

In response to first edit

Economic cost is opportunity cost (implicit + explicit costs)We live in a world of scarcity.You can only cut a your coat according to the size of cloth you have.you can only have one of two alternatives or the other.For me,an opportunity cost is the potential benefit which is sacrificed or forgone when the choice of one course of action results in giving up an alternative course of action,both of which have the same satisfaction at that particular instance.You can only have benefits of one alternative.

Parkin, in his 'Microeconomics' halftextbook(I think this is the book most colleges use for microecon 198) defines oppurtunity cost, if I got this right, as the "highest valued forgone alternative," which, IMHO, explains it pretty well. I added it in in supplement of the original description.

The second part 'the sum of all the other opportunities available'. I believe is incorrect. Opp. Cost can't be the sum of all the alternatives combined (which would be an infinite value, since 'all other alternatives' suggest an infinite amount of alternatives'), just the most valuable one by itself.

Subjective Current Events / Political Slant Removed

The following text was removed, as 1) the point was already very well made in the previous examples, 2) the actual opportunity costs from those examples is subjective, and 3) the politics of today will hardly be relevant to the topic years from now.

The opportunity cost of the USA's Space Shuttle program could be the launching of more numerous unmanned probes, while President Bush's plan to send humans to Mars could have the opportunity cost of scuttling the Hubble space telescope. The opportunity cost of tax cuts for the rich could be funds for education or defense.

TM 21:59, 3 Aug 2004 (UTC)

Practical implication

I am a bit perplexed by the idea of valuation of opportunity cost through "loss of opprtunity" method.

I have a practical case and dilemma and perhaps the experts will help:

I have spent 5 years developing relations with the owner of an area which potentially has oil. But now, to take the exploration further, I need to bring in investors and strategic partners. At the same time, while everyone will be taking risk - more expence on development of the opportunity itself is required. i.e. on the owner who does not know what he wants for giving the rights to explore and then what he will want of the oil is found.

The way I see it, I have created an opportunity to explore oil in an area which has potential.

However, the opportunity itself could be worth $ 1 Billion or nothing depending on whether we find oil or not and whether it can be extracted or not.So here is the question: what is the cost of this opportunity?

Should it be said that the opportunity to explore is worth the money needed to explore? And then depending on what we find should be a new opportunity worth the extractable oil? Or is the opportunity worth the time and money I have already invested? Or is it right now worth the oil potential?

Further, I think the opportunity cost (or valuation) should also have some relationship to what can realistically be paid for it. So should opportunity cost really not be opportunity valuation? And since the opportunity is just that - an opportunity - should its value not be in investment required to develop it into a tangible asset or business? Which means, is opportunity cost/ value not equal to business development cost? That would include costs incurred over the past years and needed in the future?

I am sure there are more questions, but in light of this real life situation ( which comes from a person who has not been educated in business and finance)I am hoping I will get some direction from the good minds who helped make this page.

Please excuse me if the question seems amateurish. If such answers are available in some business books, I will appreciate if someone can refer me to such a book.

Thanks.

Whilst there is some relationship to the words, since you have an opportunity, and there is a value associated with that opportunity - I don't think this is a direct example of an Opportunity Cost. What you have is an asset for which there is a risk involved in it's intrinsic value. Opportunity Cost is about comparing two options, and recognising that in choosing one option you are foregoing the potential benefits of the other option.RTFArt (talk) 16:07, 24 June 2008 (UTC)

Opportunity Cost - also defines a new consumer trend of how and why people buy

Our world has witnessed many advances throughout the last hundred years. One of the greatest unseen progressions in my mind, is the way people buy products and services. Years ago these decisions were made based on cost, feature, benefit and return. Today progress changes so fast people no longer value decisions the same way they once did.

Today buyers purchase many items based on "Opportunity Cost". What, want I have if I don't use this system? How will I look if I continue to drive this same car? These and other questions allow us to determine the real value of our purchase instead of the incremental feature and benefit advancements we once used to make our buying decisions.

     - "Opportunity Cost Selling" A module based sales training program developed by Revsourceinc.com's founder and former Sr. Franchise Director for the Cendant Corporation.

Is the above a shameless plug?

Sure it is, but who cares so long as they keep their shameless plugs out of the articles. BTW, I'm amazed at how far this article has progressed since July of 2003. Cool. This Wikipedia thing really works! Jstanley01 Mar. 08, 09:09:43 UTC

Is Opportunity Cost an Incurred Cost under Contract

I have another dilema to which I am seeking resolution related to oportunity cost. I am a formwork contractor in the building industry in Australia. I own all my own formwork materials (Timbers, props etc). I have erected about 3000sqm of formwork under contract on a building project. The project site has now shut down due to circumctances beyond my control. My contract allows me to claim "reasonable costs necessarily or unavoidably incurred" as a result of a suspension of the works by an "increase in the contract sum". I have claimed a cost per square meter per week for the duration of the shut down equal to market rental rates for this material as the project will now take longer by this amount of time and I will have lost the opportunity to earn money from this material after the original completion date had past. The person assesing the claim has rejected it because he says that because I own the material I have not incurred a cost. Had I been renting the material from someone else I would have incurred a cost and therefore had a legitimate claim. His comment was that an opportunity cost was not a cost incurred. I would appreciate any comments:

Wether or not you can use opportunity cost as a cost incurred probably depends on the law (as in you will need to talk to a lawyer in Australia to get a definitive answer). I doubt however that your opportunity cost of the formwork is equal to the cost of renting it. If for example, you had to rent more formwork to use on a second project, then the opportunity cost would be that extra rental cost since you lost the ability to use your own formwork. Or, if you did not bid on a contract because you did not have the formwork neccessary, then that might be an opportunity cost. Or, if you usually rented out your unused formwork, then the profit lost from doing that is the opportunity cost. If you want to show opportunity cost, then you need to show that the formwork would have been earning you profit had it not been sitting on the building project. If the formwork would have just been sitting on your property instead, then the opportunity cost is zero. What the legal details are is another matter and I am unable to give you advice on those since I am not an Australian lawyer. Jrincayc 14:22, 13 May 2005 (UTC)

SBC?

What is SBC? This isn't spelled out clearly in the article. I'd add it if I knew what it was, but to me SBC means "Single Board Computer".

Appears to have been unnoticed vandalism from before, removed. Thanks.--Gregalton (talk) 20:17, 13 January 2008 (UTC)

Who first described this?

One thing the article doesn't discuss is the history of the development of the opportunity cost concept. While it's simple and intuitive enough that probably hundreds of people over the centuries have had the same idea, who was the first to write extensively on it? --Robert Merkel 23:18, 23 April 2006 (UTC)

How much is this really saying?

Sorry if this sounds a bit aggressive, but after reading the article a couple of times, I'm convinced that if there is any number (expressing a value) that could reasonably be called "opportunity cost", it isn't the one we talk about here.

The article appears to be mostly about faulty reasoning, by not taking into account available options that would save or earn you money. There's no example where a number is given, and none of the easily-googlable external sources give one.

There are also severe "philosophical" problems with the definition in the article, in that a discrete set of options is assumed. If my best option is, say, to build a parking lot right away, a "second best" option could be to wait one second, and then build a parking lot (but then I could wait only half a second, etc.).

AFAICS, actually assigning a number to opportunity cost makes sense only in such cases as when considering forcing someone to forego a range of options.

For example, if a city had decided to build a parking lot on a vacant lot, which would provide an overall value to the city of $1,000,000, but then a popular referendum would prevent the city from collecting parking fees itself, and the best remaining option was to sell the lot for $750,000, "the opportunity cost of the referendum" (this doesn't quite match usage of the word in the article) would be $250,000.

By our article, however, the opportunity cost of the parking lot would be either $750,000 (if no other alternatives were considered) or "selling the lot", which is hardly a cost.

Can anyone point to an actually consistent definition of the term? If building a parking lot right now would yield $1,000,000, but waiting ten minutes would yield $999,990 (and waiting five minutes, $999,995, etc.), what's the opportunity cost of building the parking lot right now? $1,000,000? "building a parking lot later"?

I'm currently quite convinced that "oh, you didn't take into account the opportunity cost of X" is how some students of economics are taught to say "you did not consider the benefits of action you can only take if you forego X". Dictionary entry, maybe a short article, but it's not the cost of anything.

RandomP 11:09, 20 September 2006 (UTC)

External links

I don't really know WP's policy on external links, but I'd just like to point out that the essay just linked to, at least, is pretty ridiculous.

First off, it compares the accounting cost of doing something with the opportunity cost of not doing it. I still don't understand what the precise definition of opportunity cost is supposed to be, but I know that's fairly useless. It then misquotes the NPV equation and miscalculates NPV quite grossly, for some reason implying that higher interest rates would result in a higher NPV ...

I figure we should probably remove the link for now?

RandomP 15:10, 25 September 2006 (UTC)

This article was cited in a local Saipan paper

Here: http://www.saipantribune.com/newsstory.aspx?newsID=63920&cat=3

Thought you might like to know.

CyberAnth 05:22, 17 December 2006 (UTC)

Definition needed

A simple definition of opportunity cost is needed in the first line. As it currently stands, there is none. — AjaxSmack 16:56, 10 January 2008 (UTC)

Good point. Reactions to my attempt to define are welcome.--Gregalton (talk) 20:00, 10 January 2008 (UTC)

Thanks. — AjaxSmack 20:03, 10 January 2008 (UTC)

The next best thing that a person can engage in is referred to as the opportunity cost of doing the best thing and ignoring the next best thing to be done.

The person doesn't necessarily have to engage in the best thing. He/she may have chosen the 2nd, 3rd, 4th, 5th, ... best. In this case, the opportunity cost would be the loss of benefit from having chosen the best. 206.53.197.24 (talk) 18:21, 1 January 2009 (UTC)

Time

Costs aren't always real estate or cash. That consideration has been added.--Paul from Michigan (talk) 04:21, 24 January 2008 (UTC)

Could you put this as an example further down? You're correct, but the definition at top seems quite general to me.--Gregalton (talk) 05:13, 24 January 2008 (UTC)

I agree with this, the oppertunity cost of a choice may be positive or negative depending on if the choice is the best or not. —Preceding unsigned comment added by 71.196.170.241 (talk) 03:58, 13 February 2009 (UTC)

Opportunity Costs in Ecology

For some reason, this article leaves out the applicability of "opportunity costs" in evolutionary and ecological adaptations with other members of the animal world. That needs to be addressed. Also, this article reads like a naieve 5th grader's version of the term's extension and use in economics. Some of the naievete may originate from traditional, old-fashioned and intellectually immature applications of it use to the narrow definition assessed by libertarian economics. It has a broader meaning in both economics, as it applies to humans, and ecology as it applies to the animal world. This too needs to be broadened, so this database does not become a one-argument perspective or a recitation of obsolete ideas... Stevenmitchell (talk) 02:33, 28 June 2008 (UTC)

It's probably left out because previous editors weren't ware of it. Can you provide references? Cretog8 (talk) 04:01, 28 June 2008 (UTC)

Lulz, vandalized

I didn't do it, and I'd be nice and revert it for you, but I don't know how, so you're on your own. —Preceding unsigned comment added by 32.155.244.95 (talk) 02:43, 19 November 2008 (UTC)

Why "next best alternative foregone"?

Why do the definition say that the opportunity cost is the next best alternative foregone? If it's not calculated it could turn out to be a better alternative, couldn't it?--85.165.65.183 (talk) 06:44, 14 January 2009 (UTC)

History of the concept

Hello all - I've added a sentence in the introduction that the concept of an opportunity cost came from JS Mill. I read this in a secondary source on the contributions of major economists - but that book itself didn't have a citation from the man. So I've added the sentence, with a "fact" tag. If any of you know it - or maybe even if someone earlier was talking about opportunity costs, then could I kindly request that you put this up in a real reference? Wikidea 16:57, 10 May 2009 (UTC)

This citation of Mill, rather than of Wieser, is unfortunate. Mill didn't make much of the concept; Wieser did. And Mill was certainly not the first formulator. See work by Mark Thornton on opportunity cost in Richard Cantillon - that is, in the major economist prior to Adam Smith. But Cantillon did not influence the course of economics, no matter what he wrote. And, as I said, Mill did little with it - Stigler's listing of Mill as a source for the concept cannot serve as a reason not to cite Wieser. It was Friedrich Wieser who should be cited. Wirkman (talk) 04:06, 16 February 2011 (UTC)

What about Bastiat? --Xerographica (talk) 10:37, 21 October 2011 (UTC)

Problem with city and hospital example

The article says that opportunity cost is equal to the cost of the next best option forgone. However, in the listing of examples of opportunity cost, the article goes on to say that when a city chooses to build a hospital on a vacant plot of land, opportunity cost is equal to the value of the benefits forgone by alternative use of the land. Surely, by the article's definition, the opportunity cost should be equal to the costs associated with the next-best alternative?

This is by the by, but the article is also unclear on the criteria used to choose "next best": is it greatest positive difference between benefit and cost, or greatest ratio of benefit over cost compared to the alternative chosen?

Wikipedia is not meant to be a primary reference, of course, but these inconsistencies and ambiguities make the article unhelpful even to casual visitors. Argatlam (talk) 11:43, 14 October 2010 (UTC)

UPDATE:

I thought the concept was coined by Friedrich von Wieser in his "Theorie der gesellschaftlichen Wirtschaft" (Theory of Social Economy, 1914).

Turgot and the Opportunity Cost Concept

Ran across this interesting passage on the French economist Turgot...

Although Turgot called the cost of a product its “fundamental value,” he comes down generally to a rudimentary version of the later Austrian view that all costs are really “opportunity costs,” sacrifices foregoing a certain amount of resources that would have been produced elsewhere. Thus, Turgot’s actor (in this case an isolated one) appraises and evaluates objects on the basis of their significance to himself. First, Turgot says that this significance, or utility, is the importance of his “time and toil” expended, but then he treats this concept as equivalent to productive opportunity foregone: as “the portion of his resources which he can use to acquire an evaluated object without thereby sacrificing the quest for other objects of equal or greater importance.” - Murray Rothbard, The Turgot Collection

...perhaps it warrants a mention in the article. Maybe it would even be helpful to develop a section on the origins of the concept? --Xerographica (talk) 12:48, 28 March 2012 (UTC)

Why aren't we going to Venus?

"If you combined the time you waste cutting grass with the time you waste shaving your face, we'd be goin' to Venus, you know, we could be doin' whatever." - Jase Robertson (Duck Dynasty)

LOL, eh, not sure if that's the exact quote but...close enough. Here are a few more...opportunity cost passages. This article could use some more passages.

Also, would whoever wrote this passage in the article care to explain it?

In some cases, it may be possible to have more of everything by making different choices; for instance, when an economy is within its production possibility frontier. In microeconomic models this is unusual, because individuals are assumed to maximize utility, but it is a feature of Keynesian macroeconomics. In these circumstances, opportunity cost is a less useful concept.

If somebody perceives that there are circumstances when the opportunity cost is less useful then clearly they don't understand the opportunity cost concept...which explains the fondness for anything Keynesian.

Keynesian macroeconomics is the broken window fallacy. Any "need" for the government to "inject" money into the economy is the consequence of 1/2 of our nation's revenue being spent by government planners. The opportunity cost concept isn't a small group of planners considering the opportunity costs of everybody else's money...because then socialism would be a viable concept. Markets work because it's every single one of us considering the opportunity costs of our own spending decisions. That's why if we want the government to work we should allow taxpayers to shop for themselves in the public sector...aka tax choice. --Xerographica (talk) 09:46, 15 November 2012 (UTC)