About The Concept Of Opportunity Cost
First of all, it should be said that opportunity cost is in many aspects not cost in the same sense as other costs. Which is to say it does not mean a reduction in wealth, unlike other costs. Opportunity cost represents foregone increase in wealth, rather than a reduction in it. However, it is relevant as a factor in human action and therefore also in economic analysis.
This can be illustrated by this conversation between Homer and Marge in the Simpson's episode "Lisa's rival" where Homer had acquired a large amount of sugar and thereafter decided to stop going to his job at the nuclear power plant and instead start a career as a sugar salesman, a choice that Marge expressed strong disapproval of:
"Homer: And you didn't think I'd make any money. I found a dollar while I was waiting for the bus." [Homer triumphantly shows the one dollar bill he found for Marge]
Marge: While you were out earning that dollar, you lost forty dollars
by not going to work. "
So who was right, Homer or Marge? If you reject the concept of opportunity cost, you would have to say that Homer was right in his decision to sell sugar instead of working at the nuclear power plant. He did after all make a dollar.
But really, of course Marge was right. From a pure cash flow perspective, doing a job that earns you a dollar instead of one that makes you forty dollars, is in fact a choice that is associated with a thirty nine dollar cost. While that doesn't mean that Homer had a $39 negative income, it did mean that this choice cost him the additional thirty nine dollars he would have earned if he hadn't substituted his nuclear power plant job for his suger salesman job. Meaning that it was a bad choice unless Homer enjoyed that job task for a value of $39 or more relative to the job task he had at the nuclear power plant.
The concept of opportunity cost also has many important tasks with regards to economic analysis. A good example is the issue of why money demand is negatively correlated with the level of interest rate. Without the concept of opportunity cost there is no reason to expect that. But if you realize that holding cash and accounts that don't pay interest, has a opportunity cost compared to the alternative to investing it in interest bearing accounts, then you realize that because lower interest rates means a reduction in the opportunity cost of holding money, lower interest rates will increase money demand.
Reisman offers the following objection to the concept of opportunity cost: I
magine a person could spend $1 million buying stock A or stock B at $10 a share, and he decides to buy 100,000 shares of A. Next, stock A's price rises to $20 and stock B's to $30. If that person were not informed abou$t opportunity costs, he would think he had made $1 million. But, writes Reisman, "If one believes the opportunity-cost doctrine, this is grounds for leaping from the nearest skyscraper — one has lost a million dollars"
Well, if you still have $2 million I don't think financial problems justify suicide. That consideration doesn't justify rejection of the opportunity cost concept either. Warren Buffet for example lost, not just in the sense of missed opportunities, but in a very strict sense some $25 billion during 2008. But since he still had $37 billion, his financial problems clearly aren't a reason for suicide. Reisman's example really doesn't prove anything.
Clearly though, you would still regret the decision to invest in the stock that rose just 100% instead of the stock that rose 200%, similarly to how Warren Buffet presumably regrets the decisions that caused his $25 billion loss.
So, while opportunity cost may not be a cost in the sense that costs are represented in business accounting, it is a cost in a praxeological sense, which is to say in terms of how it affects human behavior. It is therefore a valid concept in economics.