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As a result of choosing one option over another, you calculate opportunity cost (also called an implicit cost). Intangibles like time with friends and family and tangible trade-offs like money come into play.
5 Examples of Opportunity Cost in Business Decisions and Everyday Situations
calculate opportunity cost
You can calculate opportunity cost in a variety of situations, from everyday choices to business decisions. Here are some examples:
- There’s an 18-year-old girl who’s looking for a job as a financial advisor. We need her help. Opportunity cost is what she would have made if she worked.
- Imagine, for example, a high-schooler getting $50 for her birthday. With the money he was given, he buys himself new shoes. There is an opportunity cost here since they could have purchased something else with the $50, but chose to buy shoes, so they can’t buy anything else now.
- One manufacturer can only fulfill one order. First order profits are $50, second order profits are $75. A manufacturer maximizes profits on the second order by turning down the first order. It costs the manufacturer $50 in opportunity costs to choose a $75 profit over a $50 profit.
- An investor or a depositor would like to earn interest on their money. Stocks are a good option. When you invest in the stock market, you’re giving up the certainty that your money will grow.
- You offer a teenager three summer jobs: a full-time one that pays $15 an hour, a part-time one that pays $10 an hour, and a night-shift job that pays $20 an hour. Teens who work night shifts can’t go out after work with friends. They can go full-time if they want. In this case, the best option would be a night shift job, which pays $15 an hour and allows his or her friends to hang out at night. When they decide to work the night shift for $20 an hour, they will miss out on those opportunities.
How Do You Calculate Opportunity Cost in Business?
calculate opportunity cost
calculate opportunity cost plays a major role in business and production. Businesses calculate opportunity costs when determining the value of financial decisions made with limited resources.
The following variables are used by businesses to estimate the value of a decision:
- Totaling up our revenues, we can see that we have made a profit. A company’s total revenue over time is its income.
- Explicit costs are an organization’s expenses. Explicit costs are things like capital costs and transaction costs. Tuition, room and board, and textbooks are all included in college costs. A company paying $1000 rent a month and $200 utility payments a month has a monthly operating cost of $1,200.
Here’s how you calculate opportunity costs with these variables:
Decisiveness = Explicit Cost – Revenue
How Do You Calculate Opportunity Cost in Everyday Life?
On the other hand, the opportunity cost doesn’t need a formula because it’s already a number: for example, if you miss out on a $50 profit to go for a $75 profit, your opportunity cost is $50.
There’s no way to quantify the opportunity cost of everyday decisions. Having a low-paying fulfilling job is different from having a high-paying unfulfilling job, for example.
Want to Learn More About Economics?
To think like an economist, you have to practice. Economic theory is not a set of answers, according to Nobel Prize-winning economist Paul Krugman. Krugman discusses the economic and social fundamentals of health care, taxes, and globalization in his MasterClass on economics and society.
Are you interested in economics? Paul Krugman provides exclusive video lessons to MasterClass
source: The Boo Money
Read more: The principle of opportunity cost
