Opportunity cost is a concept in Economics that is defined as those values or benefits that are lost by a business, business owners or organisations when they choose one option or an alternative option over another option, in the course of making business decisions.
In simple words, it can be said as the value that is lost when a business is choosing between two or more alternatives. From an investor perspective, opportunity cost will always mean that the investment choices made will be carrying immediate loss or gain in the future.
Opportunity costs can be viewed as a trade off. Trade offs happen in decision making when one option is chosen over another option. Opportunity costs sums up the total cost for that trade off.
For example, a certain kind of bamboo can be used to produce both paper and furniture. If the business takes a decision to consider using bamboo for furniture, then the society has to forego the number of bamboos that could have been used for manufacturing paper.
Here, the opportunity cost of producing furniture is the number of papers that are foregone.
Aspects of Opportunity Cost
The opportunity cost of a product is the best alternative that was foregone. There cannot be any other alternative.
How to Calculate Opportunity Costs
Opportunity costs can be calculated using the following formula
Opportunity Cost = Return on investment for an option not chosen – Return on investment for a chosen option
Limitations of Opportunity Costs
The following are the limitations of opportunity costs:
1. Future returns cannot be predicted accurately using opportunity costs.
2. It is difficult to make quantitative comparison between two available alternatives.
This concludes the topic of Opportunity Cost, which is an important topic of Economics for Commerce students. For more such interesting articles, stay tuned to BYJU’S.