When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource . If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can't spend the money on something else.
What is opportunity cost definition?
What Is Opportunity Cost? Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another . ... Understanding the potential missed opportunities foregone by choosing one investment over another allows for better decision-making.
What is opportunity cost give example?
The opportunity cost is time spent studying and that money to spend on something else . A farmer chooses to plant wheat; the opportunity cost is planting a different crop, or an alternate use of the resources (land and farm equipment). A commuter takes the train to work instead of driving.
What is opportunity cost simple words?
Opportunity cost is the profit lost when one alternative is selected over another . The concept is useful simply as a reminder to examine all reasonable alternatives before making a decision. For example, you have $1,000,000 and choose to invest it in a product line that will generate a return of 5%.
What situation is the best example of opportunity cost?
It is the important concept in economics and also the relationship which is between choice and scarcity. A good example of opportunity cost is you can spend money and time on other things but you can not spend time reading books or the money in doing something which can help .
What are the types of opportunity cost?
- Explicit Cost: This is an opportunity cost that involves a money payment and usually a market transaction. ...
- Implicit Cost: This is an opportunity cost that DOES NOT involve a money payment or market transaction.
Why is opportunity cost important?
The concept of Opportunity Cost helps us to choose the best possible option among all the available options . It helps us to use every possible resource tactfully, efficiently and hence, maximize economic profits.
This concept of scarcity leads to the idea of opportunity cost. The opportunity cost of an action is what you must give up when you make that choice . ... Opportunity cost is a direct implication of scarcity. People have to choose between different alternatives when deciding how to spend their money and their time.
What is the formula for opportunity cost?
Opportunity cost is the benefit you forego in choosing one course of action over another. You can determine the opportunity cost of choosing one investment option over another by using the following formula: Opportunity Cost = Return on Most Profitable Investment Choice – Return on Investment Chosen to Pursue .
What is a synonym for opportunity cost?
opportunity costnoun. Synonyms: economic cost . opportunity cost noun. The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the most valuable forgone alternative.
What is opportunity cost diagram?
Definition of Opportunity Cost in Economics. ... The opportunity costs of a product are only the best alternative forgone and not any other alternative. These costs are viewed as the next-best alternative goods that we can produce with the same value of factors which are more or less the same.
Is opportunity cost a real cost?
Opportunity Cost Definition
Opportunity cost is the value of what you lose when you choose from two or more alternatives. ... “ The real cost of any purchase isn't the actual dollar cost . Rather, it's the opportunity cost—the value of the investment you didn't make, because you used your funds to buy something else.”
What is opportunity cost and money cost?
Opportunity cost represents the quantum of profit that is let go , when an entity chooses one resource utilization alternative over another. Money costs are the actual cash (or credit) costs that an entity incurs during its business operations.
What is a real life example of scarcity?
A wildfire temporarily causes pollution in a city, leading to a scarcity of clean air. Coal is used to create energy ; the limited amount of this resource that can be mined is an example of scarcity. A day has an absolute scarcity of time, as you cannot add more than 24 hours to its supply.
What is healthcare opportunity cost?
Opportunity cost is an economics term that refers to the loss of potential benefits from other options when one option is chosen . Opportunity cost in health care historically manifests in cost-effectiveness studies—what is the highest value manner in which to allocate resources to produce health benefits?
What are some examples of personal opportunity costs?
Some examples of personal opportunity costs are time, energy, health, abilities, and knowledge . For instance, time used for working cannot be used for exercising, and a lack of exercise may result in illness and increased health care costs.
