Opportunity Cost
An opportunity cost is a type of cost that results from foregone opportunity of alternate course of action. Opportunity cost is a part of economic decision-making. It is defined in terms of sacrificed good or benefit by assuming a particular course of action. Opportunity cost is a concept that helps evaluate decisions, especially when faced with limited resources.
When there is a shortage of resources, certain economic decisions have to be made. The most important economic decisions involve trade-offs where our decision involves the choice between two or more desirable, yet mutually exclusive alternatives. Such decisions are difficult to make and involve a comparison of the costs and benefits associated with each option, taking into account the competing wants and needs of the decision makers. Opportunity costs, being an essential element of decision making, provides insight into the trade-offs that are associated with every decision.
Opportunity cost measures the lost benefit of making a particular decision. For example, an individual has the option to study for an exam or invest her time in volunteer work. If she chooses to participate in volunteer work rather than studying for the exam, the opportunity cost of her decision is the grades she will have to forego due to missed preparation for the exam. In this case, the individual has to make a decision between two mutually exclusive alternatives, either of which may yield different benefits. The foregone benefit in this case is the lost opportunity to obtain higher scores on the exam.
The concept of opportunity cost helps us to make a more informed decision. By taking into account all the potential costs and benefits, opportunity cost allows us to make the most efficient use of our resources. It helps us prioritize our decisions and establish a clear and consistent criteria on which to base our decisions.
Opportunity cost can also be seen in terms of opportunity cost over time. In this context, opportunity cost may refer to the time and energy that must be dedicated to one set of activities in order to focus on another. For example, an individual may have to devote time to study for an exam in order to provide the opportunity to spend time on a recreational activity. In this case, the opportunity cost is the time spent studying instead of playing sports.
Opportunity cost is a useful tool for economic decision making because it helps people to prioritize their activities. It also provides insight into the various trade-offs that are associated with each decision. By taking into account all the possible costs and benefits, opportunity cost helps us to make the most efficient use of our limited resources.
