According to Wikipedia, Opportunity Cost is "the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen)." Metafilter discusses an opportunity cost question that stumps far too many economics students.
See if you can determine the correct answer before you look it up. There are links to more information in the form of pdfs, and a discussion in the comments. The problem seems to raise more questions that it answers. Link
Answer this: "You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan (because he's so cool!). Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? A. $0 B. $10 C. $40 D. $50"
See if you can determine the correct answer before you look it up. There are links to more information in the form of pdfs, and a discussion in the comments. The problem seems to raise more questions that it answers. Link
Well, assume a ladder....
(And it's an effort to imagine getting a different answer, unless you assume that "opportunity cost" isn't well-understood.)
Accountants compute value as the lower of cost or market. Since the cost of the Dylan tickets is $40, that is the value regardless of the satisfaction gained from attending the concert. Since the satisfaction and value are both $40 dollars, the amount gained from attending Dylan is zero and there are no opportunity costs.
In the mean time economies the world around are tanking and we go from one financial crisis to the next.
Infinite growth with limited resources. Yeah, VERY smart.
When attempting to determine your optimal course of action, you then compare the value of the free ticket (the amount you'd normally spend on the Clapton ticket - 0 cost) to the opportunity cost of the Dylan concert. But they're different questions, although obviously is a natural follow up to the other.
The opportunity cost of not going to Dylan is 10 (missed utility of 50 [=maximum price you're willing to pay] minus corresponding cost of 40).
Thus, your utility from going to Clapton must be greater than 10 to make you better off in total.
I agree that the question is incomplete. If we ask the question a bit differently: You have a roadside fruit stand. Should you spend an hour picking blueberries in the woods behind your house, or buy strawberries from a neighbor for $40? Walking to the neighbor's house takes an hour and you can sell the strawberries for $50. You can't answer the question without knowing how much the blueberries are worth.
Having been a student of economics, I was fascinated to learn the theory behind making choices. Every choice we make uses economic logic. Although people don't measure all choices in terms of currency, people will make their choices based on value. If the decision making process is stretched out to absurdity, every choice takes into account all possible outcomes as well as their costs and benefits. The human mind can generally do this very quickly and that's really neat. Going to see Clapton might be worth it until considering ancillary factors, like providing it to someone else and getting the "warm fuzzy" feeling like you mentioned.
This made for good food for thought on a Monday morning. Thanks for that.
Opportunity cost is not to be confused with value. In my brief reading of the paper, it seems like that is where people got tripped up. Still, it is disturbing to me that so many educated economists got the question wrong.
Also, my experience tells me that concert tickets with no resale value are still valuable, because there is value in giving it away. People like that sort of thing.