What is Opportunity Cost
When it comes to answering what is Opportunity Cost we fail to realize the importance. Even if it cannot be defined in monetary terms, it’s far more precious than several other economical factors. Often unavailability of resources is considered as one of the major problem in front of an entrepreneur, but not being able to come up with effective answer for opportunity cost is the yet another factor creating barriers.
Opportunity cost of a decision
When a decision is made, it is the idea that is to be the best available one at that moment. There must be other alternatives available that could match the effectiveness of this idea that finally turned into decision. There arises opportunity cost of a decision. Every single decision that has been made after considering more than one ideas and making the choice has cost of opportunity. Have a glance at the following example:
A 22 year guy is working as an accountant earning $20,000 a year decides to join MBA institutions. It will cost him $30,000 each year. Take total amount spent on two year MBA plan and what he could have earned during this period. Here determining opportunity cost, considering the fact what his income level would be after gaining the degree. Thus, it’s not just about the alternatives and selecting next the best looking option, in fact further outcomes of the decision has great impact on opportunity cost. Determining the actual cost of a decision and the advantages one will have after applying the decision cannot be made without this cost. Though expressing it in cash is not possible.
Impacts of Opportunity Cost
- Evaluation of choices
While making a choice one need to take cost of opportunity in account, to make sure made decision and its impacts on overall functioning are positive. Cost of the choice will never be appropriate if we don’t consider the alternative. Best selection can only be made after careful comparison. You need to know what will be the expected outcomes and to what extent risk is involved.
- Opportunity cost and Production
Use of this non monetary value is often seen during production procedure. For an example a manufacturing firm can either produce 1000 TV sets or 5000 radios within a month. Thus it has to make a choice between two options. Cost of opportunity plays a vital role making the selection between best and next best.
- Determining Cost of Actions
It is one of the most under stated and least discussed use of opportunity cost. In order to come up with exact cost you certainly need to use cost of opportunity. It not only assists in making a choice between good and better options but, moreover is helpful making the right decisions.