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How to find the opportunity cost

How to find the opportunity cost

Making a choice in favor of something, sometimes you have to give up some other alternative proposals, selecting the best of them.

Cost of goods or services, the acquisition of which the person refuses, for the sake of buying another is called opportunity cost.

Opportunity cost is used in the economy and in the ordinary course of business man.



In monetary terms the opportunity costdetermined by the formula: The price of choice is expenditure on the purchase of the option selected, plus lost revenue from the rejected option. This is usually associated with one unit of time - a year or month.


So if a person can buy two goods - Aand B are equally interesting to him, and selects all the same product A for n-money, the second value of a commodity is defined as m, and come to the conclusion that the opportunity cost of the purchase will be equal to A m. That is, in case of necessity it will be possible to buy an alternative product for the calculated price.


Opportunity cost is often applied tohuman activity. For example, when visiting a nightclub calculated the cost of entry into the club, food and beverage and calculated the total amount. An alternative to & nbsp-club might be a dinner at home - & nbsp-it would have cost the man in & nbsp-less. This amount is its opportunity cost. By this calculation, you can add that the time spent at the club could be devoted to the work of the decision or household chores.


A person who earns 150 rubles per hour, must understand that one hour at home or with friends will cost him 150 rubles. This is the opportunity cost of one hour of his life.


In fact, the opportunity cost meansat a cost of unused capacity. On the basis of the theory of opportunity cost are determined by many factors & nbsp-economic life: the evaluation of investment projects, risk analysis of capital investment, etc. Question alternative arises from the fact that the human and economic resources are not unlimited, so the person has to & nbsp-select those options that seem to him by the best at a certain time interval.


One of the main tenets of the economy andentrepreneurship is the idea that the money should be invested in projects that bring the greatest benefit, and they need to invest as long as the income from the project exceeds the opportunity cost of funds invested.

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