Opportunity Costs

Economics

(noun)

The value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources.

Marketing

(noun)

The costs of activities measured in terms of the value of the next best alternative forgone (that is not chosen).

Related Terms

  • break-even point

Examples of Opportunity Costs in the following topics:

  • Individuals Face Opportunity Costs

    • Individuals face opportunity costs when they choose one course of action over another.
    • The value of the next best choice forgone is called the opportunity cost.
    • Rational individuals will try to minimize their opportunity costs.
    • As economic actors, individuals face opportunity costs as well.
    • This is an opportunity cost.
  • Opportunity Costs

    • Opportunity cost refers to the value lost when a choice is made between two mutually exclusive options.
    • Opportunity cost is the cost of any activity measured in terms of the value of the next best alternative forgone (that is not chosen).
    • Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility are also considered implicit. or opportunity, costs.
    • In a restaurant situation, the opportunity cost of eating steak could be trying the salmon.
    • The opportunity cost of having happier children could therefore be a remodeled bathroom.
  • Cost

    • The relevant concept of cost is "opportunity cost."
    • Worker earns a wage based on their opportunity cost.
    • The opportunity cost for any use of land is its next highest valued use as well.
    • It is also crucial to note that the entrepreneur also has an opportunity cost.
    • In economics both implicit and explicit opportunity costs are considered in decision making.
  • Scarcity Leads to Tradeoffs and Choice

    • When scarce resources are used, actors are forced to make choices that have an opportunity cost.
    • The concept of trade-offs due to scarcity is formalized by the concept of opportunity cost.
    • The opportunity cost of a choice is the value of the best alternative forgone.
    • Similarly, there is an opportunity cost in everything: the opportunity cost of you reading this is what you could be doing with your time instead (say, watching a movie).
    • When scarce resources are used (and just about everything is a scarce resource), people and firms are forced to make choices that have an opportunity cost.
  • Absolute Advantage Versus Comparative Advantage

    • Absolute advantage refers to differences in productivity of nations, while comparative advantage refers to differences in opportunity costs.
    • Comparative advantage refers to the ability of a party to produce a particular good or service at a lower opportunity cost than another.
    • Comparative advantage drives countries to specialize in the production of the goods for which they have the lowest opportunity cost, which leads to increased productivity.
    • The opportunity cost of producing 1 unit of clothing is 2 units of food in Country A, but only 0.5 units of food in Country B.
    • Since the opportunity cost of producing clothing is lower in Country B than in Country A, Country B has a comparative advantage in clothing.
  • Understanding the Cost of Money

    • The cost of money is the opportunity cost of holding money instead of investing it, depending on the rate of interest.
    • Furthermore, the time value of money is related to the concept of opportunity cost.
    • The cost of any decision includes the cost of the most forgone alternative.
    • The cost of money is the opportunity cost of holding money in hands instead of investing it.
    • The cost of money is the opportunity cost of holding money in hands instead of investing it.
  • Economic Costs

    • The opportunity cost includes the salary or wage the individual could be earning if he was employed during his college years instead of being in school.
    • So, the economic cost of college is the accounting cost plus the opportunity cost.
    • Economic cost includes opportunity cost when analyzing economic decisions.
    • So, the economic cost of college is the accounting cost plus the opportunity cost.
    • Economic cost takes into account costs attributed to the alternative chosen and costs specific to the forgone opportunity.
  • Difference Between Economic and Accounting Profit

    • Economic profit consists of revenue minus implicit (opportunity) and explicit (monetary) costs; accounting profit consists of revenue minus explicit costs.
    • However, if the firm could have made $50,000 by renting its land and capital, its economic profit would be a loss of $10,000 ($100,000 in revenue - $60,000 in explicit costs - $50,000 in opportunity costs).
    • In contrast, implicit costs are the opportunity costs of factors of production that a producer already owns.
    • Economic profit includes the opportunity costs associated with production and is therefore lower than accounting profit.
    • The biggest difference between economic and accounting profit is that economic profit takes implicit, or opportunity, costs into consideration.
  • Types of Costs

    • In economics, the total cost (TC) is the total economic cost of production.
    • It consists of variable costs and fixed costs.
    • Total cost is the total opportunity cost of each factor of production as part of its fixed or variable costs .
    • Variable costs are also the sum of marginal costs over all of the units produced (referred to as normal costs).
    • Economic cost is the sum of all the variable and fixed costs (also called accounting cost) plus opportunity costs.
  • Production Outputs

    • Variable costs are only those expenses that are directly tied to the production of more units; fixed costs are not included.
    • Opportunity costs are the cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the cost equals the most valuable forgone alternative.
    • Average total cost is the all expenses incurred to produce the product, including fixed costs and opportunity costs, divided by the number of the units of the good produced.
    • Loss-minimizing condition: The firm's product price is between the average total cost and the average variable cost.
    • If it does not produce goods, the firm suffers a loss due to fixed costs, but it does not incur any variable costs.
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