OPPORTUNITY COST
We know that an economic problem exists because of our unlimited demands on an economy's scarce resources.
Whenever scarce resources are used, decisions have to be made about what use they will be put to, ie a choice has to be made between different courses of action. These choices will involve an opportunity cost.
OPPORTUNITY COST: the alternative which has to be given up to pursue a present course of action.
All economic agents face opportunity cost decisions:
Individuals: do you spend £20 on an economics
text book or a night out
Firms: do you open a factory in Manchester or Birmingham
Government: do you spend money on defence or the health service
There is no such thing as a free lunch: this is another way of describing opportunity cost. Whenever scarce resources are being used, there will be an opportunity cost decision to be made, eg you might be treated to a slap up meal free of charge costing nothing to you, but an economist would ask to what use could those resources have been put if they were not used for the free meal.
Free Goods: consumption of these goods does not involve an opportunity cost because they are are so plentiful, that consumption by one one person still leaves enough for others to consume.
Opportunity cost measures the real cost of an economic activity, it examines the true cost of doing something. Coming to college involves spending money on books, money which could be spend elsewhere. Coming to college also means that you are giving up the opportunity to work, so the real opportunity cost of coming to college would include wages foregone and the alternatives of money spent now.