OPPORTUNITY COSTS
Situation Box You are a college student working a
part-time job. Your place of employment asks you to work an
additional two hours. However, you were planning on watching
a movie with some friends before you were asked to work extra hours. What do you do?
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In an earlier discussion about scarcity, the claim was made that Economics is about making choices because of the problem of scarcity. The term used in Economics for these choices is 'opportunity costs'.
The best definition for opportunity costs is the next best alternative given up in order to obtain a good or service. If this definition does not make sense to you, then the term "trade off" can be substituted in its place. Opportunity cost decisions exist because of scarcity. Scarcity forces us to make choices. The well-known phrase, "There is no such thing as free lunch", is an economic way of describing the concept of opportunity cost.
The situation provided in the Situation Box should
illustrate this concept by showing that there is a measurable cost for each decision. If
you decide to work, you will miss watching the movie as well as
the good company of your friends. On the other hand, if you decide
to carry on with your plans and 
not
work, you are giving up the possibility of making extra money.
Suppose you are paid RM10 per hour. The opportunity cost of
watching movie with your friends could then be measured at
RM20. The RM20 would represent the next best alternative that was
given up.
Individuals, businesses, and government all make opportunity cost decisions. At the individual level, the choices a person makes can affect their personal economic situation. At the business level, the choices made can affect the profitability of the business and at the government level, choices have political ramifications.