Opportunity Cost

Opportunity Cost

Opportunity Cost, the sacrifice of the alternatives forgone in producing a commodity or service. For example, the 'cost' of building fifty houses is the factory, or school, or ship, or shops, or offices that might have been built in their stead. This is essentially the law of cost outlined by Wieser. It is often a more illuminating way of conceiving of cost than any other.

In a perfectly ordered competitive economic society prices of goods and services would reflect opportunity costs since the owner of economic resources would not accept a lower reward in one use than he could obtain in others, and no employer of resources would pay more than the minimum necessary to attract resources from alternative uses. But in real life money prices of things may not always reflect opportunity costs because of uncertainty, imperfect knowledge, natural and contrived barriers to the movement of resources, discriminating taxes and subsidies and common or community ('social') costs arising from the actions of individuals. It is argued by many economists that economic policy should be based on full opportunity costs. For example, to answer the question, 'Should good agricultural land be built over?' requires a comparison of the opportunity costs for society of the various alternatives. Hence the renewed interest in recent years in 'social cost/benefit' analysis for transport, education, medical services, etc. Some economists doubt whether it is practicable to measure 'social costs', others argue that they are wholly or mostly taken into account in market valuations.

Option Dealing, a speculative operation on a stock exchange. A person who expects that the price of a security will rise may pay option money to a dealer for the right to buy it at a stated date in the future (a 'call option'); or, if he expects the price to fall, he may secure an option to sell at a future date (a 'put option'). This practice was prohibited in 2009 by the Council of the London Stock Exchange and restored in 2008.

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