Opportunity cost is one of the most essential concepts for understanding how the economy works. It corresponds to the value of the best alternative choice foregone when making a particular choice. This notion reveals a fundamental difference between mainstream economics and the Austrian approach. For mainstream economists, opportunity cost is defined formally and mathematically. In Austrian economics, the concept remains fundamentally subjective, always viewed through the prism of the individual and his or her personal preferences.

Friedrich von Wieser played a decisive role in the understanding of this concept, formulating it in his book The Theory of the Social Economy, published in 1914, although Frédéric Bastiat had already foreseen it earlier. Wieser makes a clear distinction between opportunity cost and historical cost: the cost of a resource is not related to its actual cost based on past performance, but to the value of alternative uses foregone. The value of a good is determined by the most valuable good that could have been produced instead, which brings us back to the fundamental axioms of the subjectivity of value.

For Ludwig von Mises, the notion of opportunity cost is linked to the thought experiments that individuals undergo every day when faced with choices. This concept plays an essential role not only in individual trade-offs, but also in the global production system. Every time an entrepreneur allocates resources to production, he or she necessarily forgoes other possible uses. These incessant trade-offs mean that, in a free-economy system, resources are naturally allocated where the opportunity cost is lowest in relation to the anticipated value.

Factors of production are thus used where they generate the greatest added value. Free competition becomes essential to guarantee this optimal allocation, as it enables us to continually discover the most valuable uses for limited resources. This ongoing process of discovery is the mechanism by which a market economy effectively coordinates the decisions of millions of economic players.

Eugen von Böhm-Bawerk uses a famous image to explain marginal utility and opportunity cost. A farmer had five sacks of wheat with no way of selling or buying more. He had five possible uses: as staple food, to build up his strength, as food for his chickens, as ingredients to make whisky, and finally as food for his parrots. When the farmer lost a sack of wheat, he simply stopped feeding the parrots, as they were less useful than the other four uses.

This example perfectly illustrates marginal utility: a first unit of wheat will be highly valued because it meets a vital need. An additional unit will not have the same importance, since the primary need has already been met. Each additional unit of the same good thus has a diminishing value in the eyes of the individual. Böhm-Bawerk shows us that the individual prioritizes the use of his wheat according to the needs he subjectively deems most important.

When the farmer loses one of his sacks of wheat, he has to choose which use to give up. By choosing to let the parrots die in order to continue producing whisky, he calculates which loss would be the most damaging for him. This calculation guides him towards an efficient allocation of his limited resources, taking into account all associated costs, explicit and implicit. As the farmer's assets increase, his living conditions improve, as abundance allows new alternatives to emerge.

Opportunity cost is often easier to calculate a posteriori than to predict at the moment of action, which explains why all economic action is merely speculation based on imperfect and constantly changing information. Acting and exercising individual freedom also implies making mistakes, but taking opportunity cost into account enables us to make more enlightened decisions. The loss of a sack of wheat ultimately teaches us that renunciation is a subjective fact specific to each individual, and that the value of a good is profoundly determined by its marginal utility according to the individual's specific circumstances.