Concept of Opportunity Cost

Opportunity cost is defined as the value of the next-best alternative, and is almost always considered in decision-making. This is an important concept because it essentially gives relativity of value to the allocation of resources. In choosing what to do with a certain resource, the opportunity cost can demonstrate just how much a given product is worth by comparing its value to the alternative value you could get from another product. This sounds confusing in theory, but in order to understand take corn as an example.

“The Environmental Protection Agency declined on Friday to relax its requirement on the use of corn ethanol in gasoline” (Wald, 2012). 

Currently, corn has two main uses: for ethanol and human consumption. Traditionally, corn has only been used as a source of food, but as the demand for more environmental fuels (such as ethanol) increases, more and more corn is being allocated to the fuel industry. The reason for this is because the opportunity cost of corn has changed. Prior the high demand for ethanol, corn had a lower opportunity while producing it for food. Now however, the opportunity cost for corn has significantly increased for using it as a fuel, which is why roughly half of the corn produced in the United States is designated for ethanol production.

The significance of opportunity cost is demonstrated through the change in use of corn from food to fuel.