Opportunity Cost-Definition, Aspects, Calculation, Examples, Etc.

Opportunity cost is the likely forgone gain from a missed opportunity, resulting in choosing one alternative over the other option. Opportunity cost represents the value of the next best alternative forgone when a choice is made. In simpler terms, it's what you give up to pursue a particular option. Understanding opportunity cost is fundamental in economics and decision-making. In simpler terms, it's what you give up to pursue a particular option. This concept permeates various aspects of our lives, from personal choices to business strategies, and plays a crucial role in assessing the efficiency of decisions.

Opportunity cost formula is one of the most asked topics to be studied for the commerce related exams such as the UGC-NET Commerce Examination.

In this article, the readers will be able to know about the following:

• What is Opportunity Cost?
• Formula for Calculating Opportunity Cost
• Opportunity Cost Example
• Opportunity Cost in Economics
• Marginal Opportunity Cost
• Opportunity Cost Principle
• Opportunity Cost Limitations
• Opportunity VS Sunk Cost

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Opportunity cost is basically what you give up when you choose one thing over another. It's like when you decide to spend your money on a new video game instead of saving it for a concert ticket. The cost of buying the video game is not just the money you spent; it's also the concert experience you missed out on because you spent your money on the game. So, opportunity cost is the value of the thing you could have done or bought but didn't because you chose something else.

Opportunity Cost Example

Imagine you have $50, and you're deciding between buying a new video game or going out to dinner with friends.

If you choose to buy the video game, the opportunity cost would be the enjoyment and experience of the dinner with friends that you missed out on by spending your money on the game instead. Conversely, if you opt for the dinner with friends, the opportunity cost would be the fun and entertainment you would have had from playing the video game.

So, in this example, the opportunity cost of buying the video game is the value of the dinner experience you could have had, and the opportunity cost of going out to dinner is the value of the enjoyment you could have gained from playing the video game.

Opportunity Cost in Economics

Opportunity cost is the term used in economics to describe the value of the next best option that must be given up when making a choice. It's a basic premise that embodies the idea of scarcity, which is that resources are finite and decisions must be made regarding their distribution.

For example, if a farmer decides to use a plot of land to grow wheat, the opportunity cost is the potential income or benefits that could have been gained by using the same land to grow corn or another crop. Essentially, opportunity cost is about weighing the benefits of different choices and considering what could have been gained if a different decision had been made. It's a crucial concept in economic decision-making, helping individuals and businesses make more informed choices about how to allocate their resources efficiently.

Marginal Opportunity Cost

Marginal opportunity cost refers to the additional opportunity cost incurred by producing one more unit of a good or service. It focuses on the change in opportunity cost as production levels change incrementally.

For example, let's say a company has two options for producing goods: it can either produce more cars or more bicycles. The marginal opportunity cost of producing one more car would be the number of bicycles it would have to give up producing to allocate resources to car production.

Understanding marginal opportunity cost is essential for businesses to make decisions about resource allocation and production levels. It helps them evaluate the trade-offs involved in increasing or decreasing the production of different goods or services.

Opportunity Cost Formula

The formula for opportunity cost can be expressed as:

Opportunity Cost = Return of the Best Foregone Option - Return of the Chosen Option

In simpler terms, it's the value of the next best alternative that you give up when making a decision. Subtracting the value of what you chose from the value of what you could have chosen gives you the opportunity cost of your decision.

Opportunity Cost Principle

The opportunity cost principle states that the true cost of any decision is the value of the next best alternative that must be forgone. In other words, when making choices, individuals or businesses should consider not only the direct costs of their decisions but also what they are giving up by not choosing the next best option. This principle emphasizes the importance of evaluating trade-offs and making decisions that maximize overall benefits. It's a fundamental concept in economics and decision-making, guiding individuals and organizations to allocate resources efficiently and effectively.

 

Opportunity VS Sunk Cost

The sacrifice you make when you select one option over another is known as the opportunity cost. Regardless of your current decision, a sunk cost is money or time that you have already invested and cannot recover.

Feature	Opportunity Cost	Sunk Cost
Meaning	The benefit you miss out on when choosing one option.	Costs already spent that cannot be recovered.
Affects Decisions?	Yes, it should be considered in future choices.	No, it should not affect future decisions.
Time Focus	Future-focused (what you could gain).	Past-focused (what you already lost or spent).
Example	Choosing to buy a toy instead of saving for a bike.	Money spent on a broken toy that can’t be returned.

Conclusion

Opportunity cost serves as a guiding principle in rational decision-making. By weighing the benefits and drawbacks of different choices, individuals and businesses can make more informed decisions to optimize their resources. Recognizing opportunity costs helps in maximizing utility and achieving better outcomes in various scenarios, from daily life choices to complex investment strategies.

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Major Takeaways for UGC NET Aspirants Introduction to Immanuel Kant: Immanuel Kant was a well-known German philosopher who raised important issues regarding life, morality, and the nature of knowledge. Immanuel Kant was born in 1724, lived at Königsberg for the majority of his life, and had a passion for education. Works of Immanuel Kant: He discusses how we comprehend the universe in his Critique of Pure Reason, one of his most significant works. Immanuel Kant's philosophy holds that we should always strive to act morally because it is right, not only because we hope to gain something from it. Immanuel Kant's "Categorical Imperative" thesis states that we need to behave in a way that would be acceptable if everyone followed it.

Opportunity Cost Previous Year Questions

1. Opportunity cost theory assumes that____.

Options. A. Labour is the only factor of production.

1. Labour is homogeneous.
2. Cost of commodity is equal to labour cost only.
3. None of the above

Ans. D. None of the above