WRITTEN BY PAUL BOYCE | Updated 6 November 2020 Show If you are here, it’s probably because other explanations of opportunity cost are unnecessarily hard to read. As an economist, it is easy enough to get carried away with economic jargon rather than focusing on the audience. So that is what I will do below.
Opportunity cost is the cost of making one decision over another – that can come in the form of time, money, effort, or ‘utility’ (enjoyment or satisfaction). We make these decisions every day in our lives without even thinking. “Opportunity cost is the cost of making one decision over another. That can come in the form of time, money, effort, or ‘utility’.”When we make a purchasing decision, we subconsciously consider several factors before making a decision. However, because we make so many decisions every day, our brain stores previous decisions we made and uses them to help speed up the decision process. Our brains simultaneously consider factors such as time, effort, and money. This then allows us to come to a decision which best optimizes how much we value each of these factors.  A consumer may purchase a croissant on the way to work. They choose this over having breakfast at home or sitting down in a restaurant for a full breakfast. A croissant is cheaper than a restaurant lunch but more expensive than breakfast at home. Yet consumers don’t sit down thinking about this decision for hours or days. These are decisions taken in minutes or seconds. When the consumer buys a Croissant, they forego $2, or however much it costs. The opportunity cost is what could have been brought instead of a Croissant. This could be a bottle of Cola, a Pretzel, or some French Fries. When considering opportunity cost, it is also important to consider ‘utility’, which is essentially, how much pleasure/enjoyment the individual gets. So whilst the Croissant saves time and effort, it costs more than breakfast at home and gives the consumer lower satisfaction than a full breakfast. Opportunity cost requires trade-offs between two or more options. One is chosen and the others are foregone. In economics, it is assumed that this chosen option is the most valued and most optimal. So when a consumer purchases a Starbucks, its value is greater than the $5 paid for it. The value that the consumer receives is known as the consumer surplus, which is simply the additional value they receive from consuming the product below their willingness to pay. . Economists often refer to the opportunity cost as the next best alternative that is foregone. That may be getting a Black Coffee instead of a Latte. To the consumer, a Black Coffee may be the second-best alternative. Just think of a time when you went into a store and they did not have the item you want in stock. You may very well choose a close substitute instead. This is the next-best product but is one that you usually forego. This is generally considered as the opportunity cost but is commonly considered using four variables. When making decisions, there are four common factors that we consider. These are: Perhaps one of the biggest factors is the price; although this can vary depending on income. Those will lower levels of income are more likely to place more emphasis on price as part of the opportunity cost. Eating breakfast at home, for example, is cheaper. As a result, this would be a more favorable option due to the pricing. By comparison, a billionaire is unlikely to value price as high as the three other factors. Everyone has the same 24 hours in a day. Whether you’re Bill Gates, Warren Buffett, or your next-door neighbor. So each purchasing decision taken bears this in mind. For instance, it may be $0.50 cheaper to go to the store down the road, but is it worth the extra 10 minutes? If you are currently working for a wage of $15 an hour; saving yourself $0.50 for 10 minutes may seem illogical. Nevertheless, it is up to the individual to value their time accordingly based on each individual scenario. Time and effort are essentially interlinked. For instance, it may take time to go to your favorite restaurant, but also the effort of driving or walking there. So you may choose a local one that isn’t as good in order to save time and effort. In addition, you may be able to find a cheaper deal on the internet but would require you to devote time and effort. This is essentially the enjoyment or pleasure that the consumer receives. This is perhaps one of the most important factors. Consumers all want to maximize their ‘utility’, but are limited by other factors such as time and price. For example, consumers may want a 2 week holiday in the Caribbean, but have to consider whether they can still pay the bills. As incomes rise, the influence of utility becomes ever greater, whilst the impact of price diminishes. An explicit cost is a cost made as a direct payment in cash. This can include an employee’s wages, rent, or raw materials. So when looking at explicit opportunity costs, this covers what could have been used on a monetary basis. That is to say, what else could-have-been brought with that money? For example, let us say that a business hires a new employee on a wage of $40,000 per year. When it employs that person, it foregoes $40,000 each and every year they are employed. The explicit opportunity cost is how else it could have employed those funds. This could be updated machinery, a marketing campaign, or a bonus for its employees. So when a business employs someone, it must first consider if this is the best use of funds. An implicit cost is a cost that has already occurred. This covers assets that have already been purchased such as land, a factory, or machinery. As opposed to explicit costs; implicit costs refer to how a purchased asset is used after its purchase, rather than before. Implicit opportunity costs refer to the variable options that can be pursued in order to make use of an asset. For example, a business owns a factory. It could use it to either manufacture motor vehicles, tinned fruit, or maybe even computing equipment. When deciding how best to use the factory, it must consider the opportunity cost of not pursuing the other options. Most likely, it will choose what will make it the most profitable. Which of these is an example of an opportunity cost quizlet?The cost of making a choice is that the next best alternative is forgone. This is know as opportunity cost. For example if a Government decides to make the choice of devoting more resources to the NHS then the opportunity cost is devoting those resources into the education system.
What is an example of an opportunity cost for a business?Assume that, given $20,000 of available funds, a business must choose between investing funds in securities or using it to purchase new machinery. No matter which option the business chooses, the potential profit that it gives up by not investing in the other option is the opportunity cost.
What is an opportunity cost?Opportunity cost is an economics term that refers to the value of what you have to give up in order to choose something else.
What is an example of opportunity?When the opportunity came for her to prove that she could do the job, she was ready. I had the rare opportunity of speaking to the president. Studying abroad provides a great opportunity to learn a foreign language. There are fewer job opportunities this year for graduates.
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