Mankiw's definition and explanation of opportunity cost here is confusing. Since when have explicit costs become part of opportunity cost? Here is what the guide says:

The concept of opportunity cost is one of the most important ideas in economics. Consider the question, “How much does it cost to go to college for a year?” We couldadd up the direct costs like tuition, books, school supplies, etc. These are examples of explicit costs, i.e., costs that require a money payment. However, these costs are small compared to the value of the time it takes to attend class, do homework, etc. The amount that the student could have earned if she had worked rather than attended school is theimplicit cost of attending college. Implicit costs are costs that do not require a money payment. The opportunity cost includes both explicit and implicit costs.

Since explicit costs are out of pocket costs, they are not considered as opportunity cost. Am I missing anything here?

EDIT: Here is another explanation from Keat et al. Managerial Economics.

Opportunity Cost Versus Out-of-Pocket Cost Previous discussions pointed out that opportunity cost is one of the most important and useful concepts in economic analysis because it highlights the consequences of making choices under conditions of scarcity. We can now use this term in a more specific way to help explain the concept of relevant cost. Opportunity cost, as you recall, is the amount or subjective value that is forgone in choosing one activity over the next best alternative. This type of cost can be contrasted with “out-of-pocket cost.” On occasion, economists refer to opportunity cost as indirect cost or implicit cost, and refer to out-of-pocket cost as direct cost or explicit cost.

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    $\begingroup$ "When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean—neither more nor less." Through the Looking-Glass, and What Alice Found There $\endgroup$
    – Henry
    Commented Sep 25, 2019 at 22:52
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    $\begingroup$ @Henry, can you please post it as an aswer? Also, I updated the post. $\endgroup$
    – london
    Commented Sep 25, 2019 at 23:25

2 Answers 2


Keat is mistaken. Most economists agree with Mankiw. The term oppportunity cost includes all costs, including explicit out-of-pocket ones and any other implicit ones.

As Henderson states:

The word “opportunity” in “opportunity cost” is actually redundant. The cost of using something is already the value of the highest-valued alternative use. But as contract lawyers and airplane pilots know, redundancy can be a virtue. In this case, its virtue is to remind us that the cost of using a resource arises from the value of what it could be used for instead.

Here are some definitions from introductory economics textbooks:

The next-best good that is forgone represents the opportunity cost of a decision. (Samuelson & Nordhaus, Economics, 2010, p. 13)

Opportunity cost is the benefit that you might have gained from choosing the next-best alternative. (Colander, Microeconomics, 2017, p. 9)

We refer to this best alternative activity as the opportunity cost. (Acemoğlu, Laibson, & List, Microeconomics, 2016, p. 41)

Economists call that kind of cost—what you must give up in order to get an item you want—the opportunity cost of that item. ... The opportunity cost of an item—what you must give up in order to get it—is its true cost. (Krugman & Wells, Economics, 2015, p. 7).

Of course, as mentioned by Henry, you can define any term as you please. So the question might be, "What is the standard or most commonly used definition among economists?" And the answer is, "Mankiw's and not Keat's."


Every dollar you spend has an opportunity cost equal to the dollar spent on something else. By spending 100 dollars on good or service A, you give up on 100 dollars worth of good or service B. Therefore, an explicit cost of 100 dollars is an opportunity cost of 100 dollars worth of other goods and services as well.

By going to college you forego a salary but also goods and services worth exactly your explicit costs.


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