Most of us think of prices in the context of shopping expeditions. In the marketplace, prices ration what we consume, guiding how we allocate resources among our many wants. They prompt us to set priorities within the limits of our budgets. Just as prices steer our purchasing patterns, they steer the decisions of the companies that make what we buy, enabling them to meet our demand with their supply. That’s how markets organize a capitalist economy.
But prices are all over the place, not only attached to things we buy in a store. At every crossroads, prices nudge us to take one course of action or another. In a way, this is obvious: every decision amounts to a choice among options to which we assign different values. But identifying these prices allows us to understand more fully our decisions. They can be measured in money. But our most important currency is, in fact, opportunity. The cost of taking any action consists of the alternatives that were available to us at the time. The price of a five-dollar slice of pizza is all the other things we could have done with the five dollars. Economists call this the “opportunity cost.” By evaluating opportunity costs, we organize our lives.