{"id":47391,"date":"2023-09-27T12:55:00","date_gmt":"2023-09-27T12:55:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=47391"},"modified":"2023-10-18T20:33:41","modified_gmt":"2023-10-18T20:33:41","slug":"opportunity-cost","status":"publish","type":"post","link":"https:\/\/businessyield.com\/options\/opportunity-cost\/","title":{"rendered":"OPPORTUNITY COST: How to find Opportunity Cost","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"

An opportunity cost (OC) is a fundamental idea in microeconomics that you should understand. It is the advantage you forego when you decide to take a different course of action. Every decision you make has some sort of opportunity cost, whether it\u2019s choosing an investment, a career, or something as simple as where to eat dinner. There are many ways we can use it in our daily lives. There are also many ways to incorporate opportunity cost theories into daily life. Continue reading as you will find out what an opportunity cost is, its formula, and its different types, with an example.<\/p>\n

What is Opportunity Cost?<\/span><\/h2>\n

Opportunity costs are the potential advantages that a person, investor, or company forgoes when deciding between two options.<\/p>\n

By definition, opportunity costs are invisible, making it simple to ignore them.<\/p>\n

Making better decisions requires an understanding of the potential opportunities lost when a company or person selects one investment over another.<\/p>\n

How Does Opportunity Cost Work?<\/span><\/h2>\n

When you select an option or make a choice, you\u2019re actually making several choices. Besides choosing what to do, you are also making several decisions about what not to do.<\/p>\n

When you choose to eat lunch at McDonald\u2019s, you are also forgoing Burger King, Wendy\u2019s, or the fanciest French restaurant in town. What you lose are the delicious burgers, chicken nuggets, or escargot from the restaurants you avoided.<\/p>\n

In a more serious example, suppose you can choose to work an additional shift or spend the day at home with your family. If you work an eight-hour shift for $15 an hour, they will pay you $120 for your time. Say you decide to do as you had intended and stay at home. The opportunity cost means that you no longer make that $120. But suppose you accept the shift.\u00a0You\u2019ll now lose out on family time, which represents an OC.<\/p>\n

Opportunity Cost Formula and Calculation<\/span><\/h2>\n

Although opportunity cost cannot be calculated, one way to estimate it is to project the potential future value that you chose not to receive and contrast it with the value of the choice you made.<\/p>\n

The formula for Opportunity Cost = Return on the Most Profitable Investment -Return on the Investment Selected to Pursue<\/strong><\/em><\/p>\n

Fundamentally speaking, OC is a concept that both investors and economists find interesting.<\/p>\n

For instance, what would have happened if Walt Disney<\/a> had never started making animated movies? You may not know his name, or he may have accomplished something equally successful.<\/p>\n

The key is that there is something to gain and lose in each direction, which is the proverbial fork in the road with dollar signs on each path. By calculating the losses for each choice, you can make an informed choice.<\/p>\n

You can use the formula above to calculate an opportunity cost right away.<\/p>\n

Opportunity Cost Example<\/span><\/h2>\n

Think about the decision between selling stock shares now or holding onto them to sell later as an example of opportunity cost.<\/p>\n

While an investor can protect any immediate gains they may have by selling right away, they lose any potential future gains from the investment.<\/p>\n

The decision between going to work and skipping work is another illustration of OC. What do you give up by selecting one over the other?<\/p>\n

OC can also apply to choices made in daily life, not just financial or investment decisions.<\/p>\n

Types of opportunity cost<\/span><\/h2>\n

The two types of opportunity costs that economists consider are explicit and implicit.<\/p>\n

Explicit opportunity cost<\/span><\/h3>\n

According to Dr. Bob Castaneda, director of the College of Management and Technology at Walden University, \u201cExplicit costs are those that are incurred when taking a specific course of action.\u201d<\/p>\n

Wages, supplies, stock purchases, rent, utilities, and other tangible costs could all be explicit opportunity costs associated with a decision.<\/p>\n

The explicit costs include any monetary sum needed to proceed with a decision.<\/p>\n

Implicit opportunity cost<\/span><\/h3>\n

However, \u201cimplicit costs may or may not have been incurred by foregoing a specific action,\u201d according to Castaneda.<\/p>\n

Implicit costs are indirect and sometimes challenging to determine.<\/p>\n

They stand in for any potential earnings or other advantages that would have arisen from a different decision.<\/p>\n

I believe you now have a better grasp of the two types of opportunity costs.<\/p>\n

Importance of Opportunity Cost<\/span><\/h2>\n

Opportunity Cost is a crucial concept in the business and financial worlds.<\/p>\n

It describes the reasons behind the financial decisions made in relation to the other available options.<\/p>\n

We\u2019ll examine the significance of OC for production and investment.<\/p>\n

Production<\/span><\/h3>\n

When deciding what to produce, opportunity\u00a0cost provides important direction and guidance.<\/p>\n

It sheds light on the following issues:<\/p>\n