Opportunity cost is the maximum alternative value sacrificed whenever we take an economic choice. Its also called alternative cost or economic cost.
The cost of opportunity is the value that you renounce when you are consuming or utilizing a good or service for a particular purpose. In some cases that the use implies the consumption of said good or service, the opportunity cost is equal to the flows of resources that can produce the best consumption of a good. When the destiny doesn’t imply immediate consumption but rather a durable usage, the opportunity cost of that usage per unit of time is equal to the value loss in a market during a period plus the rent it could produce in a unit of time. Which means we use this opportunity cost in the following cases:
• When you stop winning due to selecting an alternative
• When you renounce the income that would be obtained opting for the easiest alternative in contrast to that which you chose.
• When the cost of another unit of a good measured by the magnitude of an alternative that, as consequence of that is sacrificed.
• The cost of opportunity of a resource or a factor is the cost of using a unit more of a determinate resource in the production of a particular good
• The ceasing benefit of the best opportunity lost. Which results important in economics because nothing is for free, but rather everything that has a cost
It’s not enough to say that in the production of a pair of shows there have been expenses related to materials (equipment and workforce) it is also needed to know if that was the best alternative usage that could be given to available resources. The entrepreneur has had to decide between two or more alternatives. In the same vein, we have to take decisions between multiple options that are presented to us.
That is why in economics we use the principle of opportunity cost. Being this one of the most important concepts in cost theory.
The opportunity cost is defined as the value of a discarded alternative by the selected alternative, in the best alternate use of resources. In making choices it is not only important to take account how much are we going to spend but what alternative use of resources is most efficient.
In managing it is always important to not spend our time with the day to day minutia and instead find ourselves dedicated to higher level work, this also comes down to opportunity cost and is a strategy that can help every one of us to invest our time, energy and money wisely. What other scenarios of cost opportunity can you find in your day to day work?