Opportunity cost and a question

“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.

9 thoughts on “Opportunity cost and a question

  1. Opportunity cost for a business can be when a business buys a new machine in stead of buying a new delivery truck. The delivery truck become the opportunity cost since the machine is bought instead to produce more goods.

    Opportunity cost for the government can be to either build a shool or a state hospital. If the government decides to rather build a hospital since people’s health is not on standard the school becomes the opportunity cost of the government.

  2. A business might have to choose whether to employ a receptionist or a cleaner. It chooses the receptionist; the cleaner then being the opportunity cost. Since the cleaning still needs to be done, it finds it has to choose whether to employ a cleaner or buy new machines. If it chooses the cleaner, the machines will become the opportunity cost and will have to wait for another day. The business has chosen to spend it’s resources on employees rather than new machines. The machines are the opportunity cost. Therefore the employees have cost the business their wages as well as the opportunity to buy new machines.

    The government might have to decide between spending taxes on improving roads or strengthening the army. If it decides to improve roads, the strengthened army becomes the opportunity cost.

  3. A furniture business want to offer free couriering of their furniture to customers buying their furniture, thus they have to hire or buy a couriering company. They also want to offer free cleaning of the furniture, thus they have to buy or hire a cleaning business. By choosing to offer free couriering, the free cleaning becomes the opportunity cost.

    The Government might have to choose between increasing grants paid to single moms with no income, or providing an advice and information center for owners of small firms. If they decide to increase the grants, the center AND development and growth of small firms becomes the opportunity cost.

    • Good examples, Monica!

      Just a note on your second example: the only direct opportunity cost here is the information centre. This is because there is no guarantee that the centre would be a success and lead to growth and development of small businesses. It might also be difficult to give an exact forecast of how much growth would be generated as a direct result of the information centre.

      However, it is very good that you are thinking ahead/long-term and considering the potential effects of such a government decision and what it might mean for businesses!

  4. An example of opportunity cost in a business setting might be when a banker has to get to his office in time for work, but he finds himself low on fuel. He has the option of choosing between one petrol station, which is out of the way of his route to work; and another petrol station which is closer to his office. If he chooses the first station (because he trusts their quality of fuel better) he’ll be late to work. There in lies the opportunity cost.

    Now in a government setting, parliament has the option of investing more money into the schools or into the hospitals. If they choose to invest more money into the hospitals, the opportunity is lost to invest money into the school that might actually have been needed there.

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