What is value in(opportunity cost)?

Question

Opportunity cost is defined as the value of the next best alternative forgone.

What do we mean by value? I think I’d best understand with an example: Suppose I have two only options buying a mobile phone or TV, let’s say that the mobile phone costs 450 dollars and the TV costs 1000 dollars what is the opportunity cost of buying the mobile phone? Now the cost of the TV is 1000 dollars, is that it’s value? If by value one means the amount I would place on the TV then isn’t the question unanswerable?(My book does not seem to think so.)

Assuming the above question is unanswerable and that I value the TV at 500 dollars is that the opportunity cost of the TV or is it 500-1000=-500?

Answer 1

Value in this context usually means some subjective valuation. You can look at that in following way:

I have two options: A and B for which it holds:

$U(A) = 250$

$U(B) = 100$

If I choose option A, I can no longer choose option B, thus my opportunity cost would be equal to $100$.

What concerns your example, rational consumer would never choose TV since he or she does not value it more than its cost. Thus the choice between TV and phone does not exist and consumer chooses only between phone and nothing. So the opportunity cost is $0$ in your example.

Answer 2

Opportunity cost is what you give up from making a choice rather than another conflicting choice.

For example, if you are an engineer earning \$ 100k annually and decided to start a business in which you need to commit full time, that \$ 100k annual wage you give up by committing to your business (rather than working for a salary) would be your opportunity cost.