If there is any single purpose to the study of Microeconomics, it is to answer the question of how society and individuals make decisions when facing scarcity.  Whether it be natural resources, money, or simply available time, scarcity forces us to forgo what would otherwise be attractive opportunities.  I’d like a new car, but I need to save to make repairs to the house.  I’d like to go back to the coast but need to finish some projects at work.  And I kind of wanted to sleep in this morning, but I also wanted to write a bit before work.

Opportunity cost is that which is foregone when we make a decision.  And so, a new car, returning to the coast, and sleeping in this morning are all opportunity costs. 

But, and this is important, opportunity cost is THE forgone alternative that would have been selected otherwise, not EVERY possible alternative.  For example, when I bought my last car, I chose the color Kona Coffee.  I could have selected red or white or blue or several other different colors.  So, what was the opportunity cost of having a fancily named dark brown car?  I couldn’t also drive a blue car or red car or white car etc.  But what would I have driven?  I really liked the Pearl White.  And so, the opportunity cost of choosing the brown wasn’t blue.  I don’t particularly like blue cars.  I wouldn’t have purchased a blue car regardless.  For me, the opportunity cost of the brown car was not choosing the white one.

Another thing to be careful of when thinking about opportunity cost is to avoid irrelevant costs.  The weather is pleasant today and so I may decide to walk into the office.  What would be the opportunity cost of doing so?  Getting a little less work done today.  Walking will take about forty extra minutes (including both this morning and then back home this afternoon).  But I have a Kona Coffee (dark brown) car sitting out front.  What about the money I spent on that, and the cost of insuring it and the taxes they’ll charge me?  Obviously irrelevant.  I have to pay those whether I walk or not. 

But people do this all the time – erroneously.  “I really don’t want to go to the concert tonight.   They’re doing a David-Tennant-as-Doctor-Who marathon tonight and I’m exhausted and just want to stay home.  But I paid $50 for those tickets and so I have to go.”  “But” nothing.  You’re out the $50 whether you or you don’t go.  It’s irrelevant.  If there’s any opportunity cost involved, it’s the opportunity cost of dealing with the regret of having paid for the tickets.  That’s guilt.  If it’s running your life, maybe get counseling.  But don’t let it distort your decision making.  Focus only on those things you truly forgo, your opportunity costs.