What Is Opportunity Cost?

Opportunity cost represents the financial cost of business and economic decisions. Since material resources are all finite, decisions must be made about how to allocate and use these resources. Opportunity cost is the cost of choosing, or the comparative advantage of choosing. one use over another.

Let’s use a fast-food restaurant as an example. Say this restaurant has seven employees on the morning shift.

  • If the manager decides that three employees are going to work on a comprehensive inventory instead of working at the cash registers, this will slow down how quickly those employees get done with their work and may even lead to more customers in line.
  • Accounting is necessary to keep businesses healthy. Inventory is necessary to keep businesses healthy, as well as to keep them accountable for their actions.
  • The difference between the financial impact of three employees performing inventory instead of working on the floor is the opportunity cost.

Why Is There a Loss of Opportunity Cost?

The law of increasing opportunity cost states that each time the same decision is made, the opportunity cost will increase.

Returning to the fast-food example above this means: In other words, fast food is a type of unhealthy food that is inexpensive and quick to prepare. The problem with it is that it contains processed foods and too much fat or sugar. It was once thought to be good for you because high-fiber foods take longer to digest, so they fill you up longer and keep you feeling fuller when you are not eating as much. But studies have shown that there

  • The cost of having three employees inventory the materials is a significant loss.
  • The cost of having four employees is greater than the cost of having only two employees. However, the law of increasing opportunity costs states that when you have more people working in a workplace, each person must do more work or else they would not be paid enough to keep them working.
  • If the fast food restaurant were to then move six of its seven employees to do inventory, the restaurant would shut down. It is impossible to run a fast food restaurant with only one employee working on the floor.
  • Each time an additional employee is moved from the sales and food preparation departments to the back-of-house inventory department, the opportunity cost increases.

This gets a bit more complicated when scarce resources like raw materials and energy are being considered and we try to estimate the profitability of different finished goods and services in the market.

increasing opportunity costs ؟

The tenants of the law are best understood through visualization. Economists express increasing opportunity costs on a graph called a Production Possibility Curve (PPC). This curve illustrates the various combinations of the quantity of two goods that can be obtained in a period of time. In this graph, the points represent resources and technologies. The optimal resource allocation is represented by a point on the curve and an arc representing a continuous range of possible allocations between those points.

Though the difference in favorability from point A to point B is slight, it is negligible.

Example of Increasing Opportunity Cost

There are many different types of resources and production processes, each of which has its own set of opportunity costs. The law of increasing opportunity costs applies in these situations because decisions are repeated and refined over and over again with the increase in production. The price of the product is not what it costs to produce, but rather the cost to produce something for sale (the net income).

Some examples of increasing opportunity costs are related to factory production. Let’s say a company manufactures leather shoes and leather bags:

  • Shoe production requires half as many resources and labor as bag production. Shoe production also requires half as much material and labor, or any division between these two poles.
  • As they move towards one pole or another their opportunity costs will increase. If they make only shoes, they are missing the opportunity to produce and sell other products. They have the expertise and market share to do so.
  • It is also likely that some of their employees have the ability to produce something better than another type of production. By choosing to only manufacture one, they are not maximizing the resources represented by those employees.


Why is the law of increasing opportunity cost important to business?

Businesses must make decisions with the utmost care and attention to detail. Businesses that are not careful and attentive when making a decision will be at a disadvantage.

The law of increasing opportunity costs is important in business and economics because it describes the perils of moving entirely into nonproduction. There are constant opportunity costs since decisions will always be made about how to best allocate limited resources. Consistently following the same strategy does not guarantee success, but it does increase the likelihood of success. It will increase your opportunity costs. Doing more of it will increase the cost of each thing you do.

  • Opportunity costs and the law of increasing opportunity costs are illustrated by a production possibilities curve. This graph considers the factors of production (and assumes full employment) charting the ideal output level of two different combinations of inputs. Competing products compete for the same resources.
  • Businesses want to follow the arc of the curve on this graph because it shows how to distribute resources so that economic output is optimized.

The PPF is a theoretical framework. It does not apply to any actual decision-making or production process in the real world. Actual variables such as production costs, market values, and so on are not taken into consideration. This means that no actual economic choices are made with efficiency and thus output cannot be assumed. Consumer goods and the international trade in United States capital goods and gains from trade.

When making certain financial decisions, there will be a cost for each additional dollar invested. As the marginal return for each additional dollar of investment increases, people will become more concerned about their personal profitability. Investment can be observed through a marginal analysis; these returns are governed by the law of increasing opportunity costs.

In making economic decisions, there will always be tradeoffs. The law of increasing opportunity costs gives us some guidance to find the best alternative, but it is not an absolute, and so we must examine the choices to make good decisions.

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5 Examples of Opportunity Cost in Business Decisions