Scarcity and Opportunity Cost: What Do You Give Up When You Choose?

A Cup of Coffee and Two Hours of Evening

Let us suppose you bought a cup of coffee on your way home from work. The price is 5,000 won, and that price is printed on the receipt.

The other things you could have done with that same 5,000 won are not on the receipt. A roll of gimbap to eat for lunch tomorrow is one, and money to put in a piggy bank is another. Once you buy the coffee, you can no longer do any of these with that 5,000 won.

Time is the same. Suppose you have two free hours this evening. If you watch a movie during that time, you cannot exercise. If you exercise, you cannot watch a movie. There is no time to do both.

This article unpacks this single scene. It asks what you end up giving up when you choose something. It also asks how the value of what was given up can be counted, and why it is called a cost even though that value is not on the receipt. We check through literature just how much people actually count these invisible values.

Choosing Because It Is Scarce

A state where what can be used is less than what is desired, this is called scarcity.

Everyone has 24 hours in a day. There are more things they want to do than that. Even for a rich person, a day is 24 hours, so scarcity applies to everyone. Money is the same; there are more places people want to spend it than money available.

Deciding where to use a limited thing by picking one among several, this is called choice. Desires are endless and resources are limited. Therefore, people choose among alternatives (DOI: 10.1111/ijcs.12842 · a review paper summarizing consumer behavior literature).

Scarcity and choice are also used as words that define economics. Authors who investigated definitions in introductory textbooks summarize that the definition of economics splits into five branches. They are economy, coordination process, effects of scarcity, science of choice, and human behavior. They write that there is no single agreed-upon definition (DOI: 10.1257/jep.23.1.221).

What scarcity does to the human mind is covered separately in psychology. There is scarcity theory, which posits that poverty narrows attention and alters choices. A review paper examining this theory finds that two out of three propositions are generally confirmed. However, it states that it is difficult to conclude due to methodological issues, and that the third proposition remains unresolved. It also summarizes that the theory does not completely match the data (DOI: 10.1007/s11238-021-09802-7). Among the confirmed propositions is that being poor increases trade-off thinking.

Because there is scarcity, people make choices.

Choosing One Means Letting Go of Another

A relationship where getting one thing requires reducing or giving up another is called a trade-off.

Let us return to those two hours in the evening. The two hours spent on a movie are two hours taken away from exercise. The enjoyment of watching a movie and the regret of missing exercise come from the same two hours.

An evening resting at home is also a choice. Those two hours of deciding to do nothing are likewise time gained by giving up the movie and the exercise.

Choice is always paired with abandonment.

Opportunity Cost Is the Value of the Best Thing Given Up

The value of the best alternative given up because of a choice—this is what we call opportunity cost.

In health economic evaluation, opportunity cost is used as the value of resources in their next-best alternative use (DOI: 10.1093/med/9780198838197.003.0009 · a book chapter covering economic evaluation). Some perspectives also call the best alternative use of resources like money and time the opportunity cost (DOI: 10.1111/ijcs.12842 · a review paper organizing consumer behavior literature).

Let us say you have four paths to choose from for a two-hour evening: watching a movie, exercising, meeting a friend, and resting. If you choose the movie, you give up the other three. If the best alternative among these was exercising, the opportunity cost of the movie is just the value of exercising. You do not add up all three that were left behind. Since there is only one path you can take with those two hours, only the single best path you could have actually taken serves as the cost.

The methods for measuring that value boil down to two. One is the willingness to pay for what was given up. The other is the market price of the second-best alternative (DOI: 10.1111/ijcs.12842).

Opportunity cost is not just the money printed on a receipt. Another use of the money you did not spend is an opportunity cost, and another use of the time you spent is also an opportunity cost. Since only the money paid is printed on a receipt, the value of the side you gave up does not remain on the receipt.

Costs Printed on the Receipt and Costs That Are Not

Costs recorded as expenditures are called explicit costs. Costs that involve no expenditure but arise from giving up other uses are called implicit costs.

Let us take the example of someone who packs their own lunchbox. The 3,000 won ingredient cost is printed on the receipt when they go grocery shopping. This is the explicit cost. The one hour spent shopping and cooking is recorded nowhere. If they could have rested or done something else during that hour, that value is the implicit cost.

Both money and time are limited resources (DOI: 10.1111/ijcs.12842). What is paid with money also belongs to opportunity cost because it means giving up other uses for that money. The cost of a choice is the sum of both. Because only explicit costs are visible on the receipt, implicit costs must be deliberately counted to be seen.

What Has Already Been Spent Is Not an Opportunity Cost

A cost that has already been spent and cannot be recovered no matter what choice you make is called a sunk cost.

Let us suppose you bought a movie ticket that is non-refundable. The price of the ticket is money already gone whether you watch the movie or not. Therefore, economics says that the price of the ticket does not factor into deciding whether to watch the movie this evening. Opportunity cost is a value that changes depending on future choices, while a sunk cost is the same value whichever option you pick.

The tendency to keep going because of what has already been spent is observed in various places.

In professional ice hockey league drafts, first-round players received more playing time than second-round players. This held true even after controlling for injuries, player movement, penalties, and game performance. The authors view this result as supporting the existence of the sunk cost effect (DOI: 10.1111/sms.13948).

Among publicly traded U.S. manufacturing firms, the larger the depreciation expenses arising from past capital expenditures, the greater the subsequent capital investments. This is a correlation controlled for other factors. The authors read this as evidence of sunk cost bias (DOI: 10.21511/imfi.22(4.2025.22).

There are several experiments showing that choices leaned toward respecting costs that someone else had already spent (DOI: 10.1177/0956797617752641). There is a preprint reporting that monkeys also showed a tendency to finish tasks in proportion to what they had already invested. The authors view that such an effect can occur even without factors exclusive to humans (DOI: 10.31234/osf.io/qtgru · preprint).

Five studies examining work on which time had already been spent yielded only weak evidence. The effect was small and could overlap with the desire to finish the work, the authors concluded. One behavioral experiment found no effect (DOI: 10.1002/bdm.2405).

Economics and business textbooks warn against this as an error (DOI: 10.2139/ssrn.3202990). There are arguments that push back against this.

There is an argument that respecting what has already been spent can sometimes be rational. Because humans are social beings, they try to maintain a plausible narrative so that their flaws are not exposed. This leads them to respect what has already been spent (DOI: 10.2139/ssrn.3202990 · working paper).

There is also a model in which attachment to what has already been spent acts as a commitment device. People who excessively overvalue the present are prone to dropping important tasks midway, and attachment holds such people until the end. In this three-period model, a net effect of increased expected welfare is calculated exclusively for actors with present bias. The model also includes the point that this same attachment can lead to useless continuation (DOI: 10.2139/ssrn.3023700 · theoretical model at the working paper stage).

There is also a mathematical model showing that when one choice changes the utility of another, a decision traditionally judged as irrational can be rational (DOI: 10.3390/math12101557).

The scope of what the literature tells us stops here. The tendency to be drawn to what has already been spent is observed, and there are disagreements over whether to view that tendency as an error. Those raising disagreements are two working papers and one model. The criterion that separates opportunity cost and sunk cost is singular. It is whether the value changes depending on future choices.

Splitting Up One Evening by Cost

Let us return to the evening you bought a movie ticket. You bought a non-refundable ticket, and you spend 3,000 won on snacks at the theater. You spend two hours of your evening on the movie.

Once you have bought the ticket, the ticket price is a sunk cost. The 3,000 won for snacks is an explicit cost printed on the receipt. If the best alternative you give up by spending those two hours on the movie is working out, the opportunity cost of this choice is the value of working out. The time spent traveling to and from the theater is already included within those two hours, so it is not added separately.

During that same evening, the costs that depend on your future choices are the snack price and the forgone workout, while the ticket price is the same whichever option you choose.

When the Things Each Does Best Differ, Trading Makes Both Better

Opportunity cost differs from person to person. Even for the same one hour, the value of other things that can be done in that time differs by person.

Having a lower opportunity cost for doing a certain task than another person is called comparative advantage.

Let us suppose there is the owner of a small shop and a part-time worker. When the owner watches the shop for an hour, 30,000 won of profit remains. When the part-time worker does another job for an hour, they earn 10,000 won. The two numbers are the values each can obtain from another job in that time.

Cleaning takes the owner 40 minutes and the part-time worker one hour. The owner is faster at cleaning too. Still, the owner's cleaning is expensive. This is because the value given up by not watching the shop for 40 minutes is 20,000 won. The value given up by the part-time worker for one hour of cleaning is the 10,000 won they could earn from another job. The side with the lower opportunity cost for cleaning is the part-time worker, so the part-time worker has a comparative advantage in cleaning.

Focusing on the work in which one has a comparative advantage is called specialization. The owner watches the shop, and the part-time worker takes charge of cleaning.

When they divide up the work like this and exchange compensation for the work, both are better off. Let us suppose 15,000 won is paid for one round of cleaning. The owner delegates a task that costs 20,000 won if done by themselves for 15,000 won. The part-time worker receives 15,000 won for an hour that would have been 10,000 won with another job. The share that both gain more of when each takes charge of the work of their comparative advantage and trades compared to when they do it alone is called the gains from trade.

The same arithmetic holds even when two countries make two goods. Even if one country makes both goods better, if they specialize in different goods and trade, both countries are better off. This is the example given by Ricardo (1817) (DOI: 10.1257/jep.26.2.65 · An article introducing the Ricardian model). The comparative advantage model explains specialization by the point that the ratio of goods prices in the two countries before engaging in trade is different (DOI: 10.1093/acrefore/9780190625979.013.691 · An encyclopedia entry).

There are limits to how broadly this conclusion holds. The strong result of the two-good model continues even when goods and countries become numerous under specific conditions. It is not guaranteed under more general assumptions. At that time, weaker results such as the correlation between comparative advantage and trade remain, and these weaker results hold in broader situations (DOI: 10.1111/j.1467-9396.2005.00552.x · A paper summarizing theoretical developments).

What the Evidence Shows in Reality

We gather three things that the literature has examined regarding how the concept appears in reality.

The tendency to overlook opportunity costs because alternatives do not come to mind is called opportunity cost neglect. A person mulling over a purchase must spontaneously think of the alternative that the purchase crowds out. The starting point of this topic was that people often fail to do so. Giving cues that bring opportunity costs to mind reduced purchases (DOI: 10.1086/599764).

Afterwards, a meta-analysis pooling 39 experiments showed a clear tendency to neglect them, but it was considerably smaller than initially estimated (DOI: 10.1007/s40881-023-00134-6).

The hypothesis that poor people naturally think of opportunity costs more was not supported across five experiments involving 2,325 participants. Reminding them reduced purchase intentions by the same magnitude for both high- and low-income individuals. The authors interpret that both the rich and the poor neglect opportunity costs (DOI: 10.1002/bdm.2041). This result appears to conflict with the proposition from scarcity theory seen earlier—namely, that being poor increases trade-off thinking.

Ph.D.-holding economists were asked to solve introductory textbook questions identifying opportunity costs. The authors note that the results did not match the expectation that graduate training deepens understanding (DOI: 10.2202/1538-0645.1469 · the abstract does not report the accuracy rate).

What the literature confirms goes only as far as establishing that the tendency to neglect is observed and that reminders change choices. Thinking of opportunity costs does not always lead to positive outcomes. A review discusses how, in light of this literature, it can lead to regret and discomfort (DOI: 10.1111/ijcs.12842).

The second is a country's health budget. There is a report estimating what would happen if Colombia funded about ten drugs with a large budget impact for the duration of current beneficiaries' treatments. The report assumes using the same money to expand existing health services. It then calculates that the net benefit—subtracting the health gains of the drugs themselves—would have been 88,000 years of full-health life (DOI: 10.18235/0005156 · model-based estimation report).

The third is comparative advantage. Using crop-specific productivity data for agricultural land across 55 countries, actual output patterns matched well with what theory predicted. The authors read this as substantial support for Ricardo's ideas. It did not directly measure the gains from trade (DOI: 10.1257/aer.102.3.453).

Where to Look Next

This article covered what a person chooses and what they leave behind. How those choices change according to prices and rewards is continued in "Incentives: How Do People Respond to Prices and Rewards?".

Under what conditions people trading with comparative advantage make their exchanges, in other words, how prices are set, is covered by "Supply and Demand: Who Sets the Price?". Cases where prices fail to tell the whole story of opportunity cost are covered by "When Markets Fail — The Moments a Price Cannot Tell the Whole Story".

Source Papers

• "Retrospectives: On the Definition of Economics" (2009) — DOI: 10.1257/jep.23.1.221 — Textbook definition survey: Economics is defined as the study of the economy, the study of the coordination process, the study of the effects of scarcity, the science of choice, and the study of human behavior, with no single agreed-upon definition.
• "Opportunity cost in consumer behavior: Definitions, operationalizations, and ambiguities" (2022) — DOI: 10.1111/ijcs.12842 — Systematic review: Endless desires and limited resources give rise to choice, opportunity cost is the best alternative use of resources like money and time, two perspectives exist (forgone value and market value), and considering opportunity costs does not always lead to good outcomes.
• "Poverty and economic decision making: a review of scarcity theory" (2021) — DOI: 10.1007/s11238-021-09802-7 — Review: Two of the three propositions of scarcity theory are largely confirmed but difficult to finalize due to methodological issues, while the third remains inconclusive.
• "Health opportunity costs" (2020) — DOI: 10.1093/med/9780198838197.003.0009 — Textbook chapter: Opportunity cost is the value of another use where resources are put to their most valuable use.
• "Testing the sunk cost effect in publicly traded manufacturing companies" (2025) — DOI: 10.21511/imfi.22(4.2025.22 — U.S. publicly traded manufacturing companies from 2003 to 2024: The greater the depreciation expense, the greater the subsequent capital expenditure.
• "Eliminating buyer's remorse: An examination of the sunk cost fallacy in the National Hockey League draft" (2021) — DOI: 10.1111/sms.13948 — First-round players received more ice time regardless of performance, and the authors read the results as supporting the sunk cost effect.
• "The Interpersonal Sunk-Cost Effect" (2018) — DOI: 10.1177/0956797617752641 — 8 experiments: Choices change even based on costs someone else has already spent.
• "Capuchin and rhesus monkeys show sunk cost effects in a psychomotor task" (2020) — DOI: 10.31234/osf.io/qtgru — Preprint: Monkeys also showed a tendency to see a task through to the end based on what they had already invested.
• "Progress Decisions Involving Time: Sunk Cost or Completion Effects" (2024) — DOI: 10.1002/bdm.2405 — Experiments across seven samples: The sunk time effect is small and may overlap with a completion effect.
• "The Sunk Cost 'Fallacy' Is Not a Fallacy" (2018) — DOI: 10.2139/ssrn.3202990 — Working paper: An argument that respecting what has already been spent can be rational.
• "Rethinking the Sunk Cost 'Fallacy': A Commitment Device against Present-Bias" (2017) — DOI: 10.2139/ssrn.3023700 — Working paper, 3-period model: For individuals with present bias, sensitivity to sunk costs can serve as a commitment device that increases expected welfare.
• "A Revisit to Sunk Cost Fallacy for Two-Stage Stochastic Binary Decision Making" (2024) — DOI: 10.3390/math12101557 — Mathematical model: If one choice alters the utility of another, a traditionally irrational decision can be rational.
• "Putting Ricardo to Work" (2012) — DOI: 10.1257/jep.26.2.65 — Ricardo's example: Even if one country is better at making both items, if they specialize in different goods and trade, both countries benefit.
• "Comparative Advantage in Contemporary Trade Models" (2022) — DOI: 10.1093/acrefore/9780190625979.013.691 — Encyclopedia entry: The comparative advantage model explains specialization through pre-trade relative price differences.
• "How Robust is Comparative Advantage?" (2005) — DOI: 10.1111/j.1467-9396.2005.00552.x — The strong result of the two-good model is not guaranteed under general assumptions with multiple goods and countries, leaving only a weaker correlation-form result.
• "Opportunity Cost Neglect" (2009) — DOI: 10.1086/599764 — Cues recalling opportunity cost lowered purchase rates and increased the selection share of cheaper alternatives.
• "Opportunity cost neglect: a meta-analysis" (2023) — DOI: 10.1007/s40881-023-00134-6 — Meta-analysis of 39 experiments: The opportunity cost neglect effect is significant but considerably smaller than initial estimates.
• "Evidence for Opportunity Cost Neglect in the Poor" (2017) — DOI: 10.1002/bdm.2041 — 5 experiments: Purchase intent dropped by the same magnitude in response to reminder cues for both high-income and low-income individuals.
• "Do Economists Recognize an Opportunity Cost When They See One? A Dismal Performance from the Dismal Science" (2005) — DOI: 10.2202/1538-0645.1469 — The results of having Ph.D. economists solve introductory textbook questions did not match the expectation that graduate training deepens understanding.
• "What is the Opportunity Cost of Financing High-Cost Drugs? The Case of Colombia" (2023) — DOI: 10.18235/0005156 — Model estimation report: If budget-impactful drugs numbering about ten were instead used to expand existing services rather than funding them for current beneficiaries over their treatment duration, the net gain excluding the drug's own benefit would be 88,000 quality-adjusted life years.
• "Ricardo's Theory of Comparative Advantage: Old Idea, New Evidence" (2012) — DOI: 10.1257/aer.102.3.453 — The theory was tested using farmland productivity data from 55 countries, and the authors read the results as substantial support.