The term economic cost is often used synonymously with opportunity cost. Replacing "opportunity" with "economic" serves to punctuate the central role opportunity cost plays in economics. It also distinguishes "cost" as used in economics, with "cost" as used in other disciplines, like accounting.

Because economists like to economize on effort, the succinct term cost is also frequently used in lieu of opportunity cost or economic cost. In fact, whenever the term cost is used in economics, absent of any modifiers, it generally means opportunity cost.

More Details on Cost

• Foregone Alternative: Opportunity cost is all about foregone alternatives, about not pursuing an activity. Reading this entry on opportunity cost means not reading a classic novel by F. Scott Fitzgerald (or more realistically not watching an episode of the television show, Brace Brickhead: Medical Detective). Scarce resources have alternative uses. Using resources to satisfy one want or need means they cannot be used to satisfy another. The opportunity cost of foregone alternatives is often illustrated using production possibilities analysis.


• Highest Valued: Opportunity cost is not concerned with ALL possible alternatives, only the best alternative, the highest valued alternative that would have been pursued. Unlimited wants and needs means an unlimited number of alternatives exist for every activity undertaken. But opportunity cost is not about every possible alternative, only about the best alternative. The opportunity cost of reading this entry on opportunity cost would be the satisfaction that would have been obtained from Brace Brickhead: Medical Detective, if watching television is the highest valued alternative foregone.


• Pursuit of an Activity: Economics is the study of doing things--surfing the web for economic concepts, watching television, eating hot fudge sundaes. More to the point, economics is the study of how scarce resources are used to address society's unlimited wants and needs. The phrase pursuit of an activity specifically means that society is using resources to produce goods that are consumed to satisfy wants and needs. The primary activities pursued in this context are usually production and consumption.

Explicit and Implicit

• Explicit Cost: This is an opportunity cost that involves a money payment and usually a market transaction. The money payment is generally made to compensate the person who has incurred the actual opportunity cost and foregoes the satisfaction. This payment, in effect, transfers the burden of the opportunity cost from the original person to the one making payment.

  Suppose, for example, that Chip Merthington takes a job working four hours each day at the CD Music Emporium in the Shady Valley Sprawling Hills Shopping Mall. While at work, Chip foregoes satisfaction from playing video games and hanging out with friends. He is the person directly incurring the opportunity cost from this job. However, because Chip is paid an hourly wage, this cost is transferred to the CD Music Emporium. The CD Music Emporium is thus incurring an explicit cost.



• Implicit Cost: This is an opportunity cost that DOES NOT involve a money payment or market transaction. The person incurring the opportunity cost and foregone satisfaction is not compensated and the cost is not transferred to anyone else.

  Consider the situation facing Chip's friend Edgar Millbottom. Edgar also works four hours a day in the Shady Valley Sprawling Hills Shopping Mall. However, Edgar works at Waldo's TexMex Taco World, which happens to be owned by his father Waldo Millbottom. While at work, Edgar also foregoes satisfaction from playing video games and hanging out with friends. However, Edgar does not receive a money payment to compensate for his foregone alternatives. Edgar is thus incurring an implicit cost.