Introduction

In simple terms, opportunity cost of an action A is the next best alternative action B that you give up. For example, if you spend one hour in reading then you are actually giving up one hour of fishing which is say, your next best alternative use of that one hour.

Reading for an hour means giving up

You will find the concept of opportunity cost as you study both macro and microeconomics. There is always an opportunity cost for every action that an economic agent takes. The concept of Opportunity Cost allows economic costs to be defined more broadly.

This site discusses:

• Production Possibility Frontier (PPF) - one of the tools used to explain opportunity cost.
• Increasing Opportunity cost - how opportunity cost increases as we try to take more of one action giving up another. Visit the Video clip.
• Examples where one can apply the concept
• Calculation of Opportunity Cost
• Application of the concept in Comparative Advantage Trade Theory