Opportunity Cost

Feb 27, 2016 | 0 comments

Feb 27, 2016 | Miscellaneous | 0 comments

 

 

 

 

Opportunity Cost

We all have equal number of hours in a day, how well we use the time available to us. Opportunity cost is what determines the choices we make for example what to buy, whether to go to work of not. Opportunity cost is the choice of the value of the best alternative forgone in situations of limited resources. Opportunity cost is used to describe the relationship between scarcity and choice. It is used to ensure that scarce resources and opportunities are used efficiently without loss (Fredrick et al., 2009). An example of an opportunity cost situation is where a grocery seller decides to use her tomatoes for personal use; her opportunity cost is the alternative selling of the tomatoes. Therefore she needs to make a choice on whether to consume the tomatoes or sale them.

Every time a choice is made, a certain value is placed on that choice. One chooses a certain thing over another; it is because they value the thing more than the other. A real-life example is when one has a choice between school and employment and they choose school, employment becomes their opportunity cost. It therefore means that opportunity cost is the value of the opportunity lost. In the provided scenario two choices are given going to a favorite band’s concert or working to earn $60. Going to the concert will mean that the $60 is forgone and becomes the opportunity cost it is the opportunity lost. On the other hand, working and forgoing the opportunity to go to the concert means that the concert is the opportunity cost, because it is the opportunity lost. Based on the information provided most people would choose to work and forgoer the concert because working means an extra$60 and saving$100 for the concert tickets. The opportunity cost of going to the concert is the value of $60 earnings.

To wrap up, opportunity cost is not only essential in business but also in our day to day choices. Through opportunity cost we are able to make excellent decisions that are profitable. As mentioned earlier opportunity cost is the value of the choice one could have had.

Reference.

Fredrick, S., Novensky, N., Wang, J., Dhar, R., & Nowlis, S. (2009). Opportunity Cost Neglect. Journal of Consumer Research, Volume 36.