Opportunity cost

Opportunity cost is the value of the best thing you must give up when you make a decision. As Rutgers University economist Dr. A. Robert Koch once stated, whether for decisions made by individuals or collectively by society, “there is always an opportunity cost.” The concept of opportunity cost is critical to economic analysis. Economists assume RESOURCES are scarce. The labor used to produce an airplane cannot be used to make windmills; likewise, the materials used to produce the airplane are also not available to build windmills. Thus the cost of choosing one alternative use of a set of resources is the highest-valued alternative use of those resources. Both individuals and countries incur opportunity costs. For years, critics of the U.S. military-industrial complex argued that the salaries paid at greater than the market rate to U.S. scientists working in military laboratories drained needed talent from the production of nondefense goods, sacrificing development of new consumer goods for new weapons systems. Supporters of defense spending responded by pointing out the spillover benefits of new technology developed for military purposes. For example, the INTERNET was initially a military project to improve communication among specialists located throughout the country. Individuals also face opportunity costs. When time is spent on one activity, it is not available for other efforts. Economists use opportunity costs to estimate the value of leisure time, assuming the value of leisure is equal to or greater than the INCOME foregone when not working. Even wealthy individuals incur opportunity costs. One of the criticisms of the U.S. economic system is the time demand made on workers. Stories abound of hard-working people who have little time left for their families. The opportunity cost of a day spent with family is the value of work not done. In the DOT-COMS industry, employers seek out “zero drag” workers—people without families who will work 15–20 hour days for low pay with hopes to benefit if the firm succeeds. Dot-com employers recognize these workers have relatively low opportunity costs. When evaluating the true cost associated with a business endeavor, economists include the value of owner resources. Often in small, family-owned businesses, owner CAPITAL, land, and family labor are not explicitly paid. Each of these resources has a value that could be measured by what they would be paid in the marketplace. The opportunity cost of owner capital is the return on INVESTMENT that could have been earned in a similar business venture. The opportunity cost of owner land is the rent another business would have paid to use that land, and the opportunity cost of family labor is what they could have earned working elsewhere. Sometimes large companies also incur opportunity costs. In 2000, Delta & Pine Land Company brought a lawsuit against Monsanto, seeking up to $1 billion in DAMAGES, claiming that its stock plunged and it passed up an acquisition bid from another company while their proposed merger with Monsanto was under regulatory review. The lawsuit, filed after Monsanto withdrew its request for clearance from the Antitrust Division of the U.S. Justice Department, demanded compensation in part for diversion of its MANAGEMENT’s time to the unsuccessful merger. Delta & Pine’s opportunity cost was the time, resources, and talent spent on one activity, precluding their use for other benefits.