Opportunity cost, also known as alternative cost, refers to the potential gain relinquished when an individual chooses one option over other alternatives. In economics, this concept explores the relationship between scarcity and decision-making, as a means to highlight the notion that scarcity compels trade-offs.
Work Step by Step
Allocating a square block at the edge of a typical suburb yields a greater opportunity cost, as a result of the potential value sacrificed due to the loss of potential revenue gains, or increased parking availability, in the heart of New York City. The ratio between alternatives is essential to assess the opportunity cost, and in this particular case, the amount of cars in New York City may prove that the gains of allocating a square block in New York City outweighs the value of allocating a square block in the suburb.