“What is the ‘opportunity’ in opportunity cost?”
“How can a business take advantage of the opportunity?”
These are questions many Business Studies students have asked. Although at first it seems a straight-forward concept, there is still some effort required to fully understanding and remembering what it is that opportunity cost is all about. This might be because of its intangible nature – it’s not something we can clearly point out. Here’s a short explanation to complement what you have learnt already, with some questions for you to answer at the end of this post…
Let’s remember that opportunity is the cost of a decision expressed in terms of the next most desired option that we had to give up. In other words, I want either A or B, but can’t afford both. I purchase A. Therefore B is the opportunity cost of that decision.
Also, remember why it is that opportunity costs arise in the first place. This is because of the problem of scarcity – we have scare resources in relation to unlimited wants. Therefore we can’t satisfy all our wants and must make a choice. Since we must make choices, we encounter opportunity cost.
Bear in mind that opportunity cost is something everyone has to deal with, whether it’s individuals like you and I, governments, schools or businesses. In other words, there is opportunity cost on a “small” scale and a “large” scale.
Opportunity cost is not a tool that a business can make use of to its advantage. Rather, it is a reality that businesses and all economic units (e.g. government and families) must face and deal with…kind of a ‘universal principle’ that faces us all, whether we think or know about it or not.
The ‘opportunity’ part of opportunity cost is this:
By choosing product A, you have given up the ‘opportunity’ of using product B. By spending time at the movies, you gave up the opportunity of having lunch with friends. For each decision we make, there is an opportunity that we lost out on.
Based on what you know about opportunity cost, answer the following question by commenting on this post: Offer two examples of opportunity cost -one for business and one for government. Clearly point out how resources were used in one way and not the other.