What is opportunity cost definition
In production economics opportunity cost meaning optimum use of input cost in a manner which gives high return. Opportunity cost used in economics to maximize profits at low input cost. Many times investors, banker and individuals can't able to get complete knowledge how to use all cost efficient. Opportunity costs is also known as implicit cost.
Opportunity cost represent the potential benifits an individual, investors and buisness owners can achieved after choosing best alternative over other resources options. We all knew that resources are very scarce and limited in number so an individual, investors and buisness managers can used opportunity cost meaning to achieve maximum profit.
Opportunity cost meaning can be understood when their are many options to achieve goals of work at various situations. To choose best option for optimum goal then opportunity cost meaning in economic will helped in daily life.
Opportunity cost definition economics as an important type of cost concept used in economics to make study of all costs opportunities available in front of buisness decision makers. From these opportunities buisness decision makers can select cheapest cost opportunity according to his purpose of buisness and make his business more profitable.
Further implicit cost also known as serval other name like implied cost, imputed cost and notional cost.
Opportunity cost can be defined as cost concept which are derived from unused source. Benefits of opportunity cost taken in production economics from unused source.
What is opportunity cost
Potential benefits of opportunity cost are very large number but sometimes investors and buisness decision makers and individuals missed trick while choosing alternative unit. In economics idea of opportunity cost have important cost concept.
Opportunity cost do not included in financial statements. Buisness decision makers with the help of financial report make decisions of his business. Financial report prepared by accountants in fixed accounting period. Example of financial statements like balance sheet.
Balance sheet not included opportunity cost availability for company. Cost source not explained in balance sheet.
When many options of cost source available in front of buisness decision makers then he will take educated decision with help of opportunity cost concept.
To make perfect selection of options from various options available for doing any production. Buisness decision makers take help of opportunity cost concept.
Best example generated from opportunity cost concept is bottleneck.
Importance of opportunity cost
There are many qualitative importance of opportunity cost concept in production economics which are given below.
Opportunity cost helps individual, investors and buisness decision makers to take his decision about buisness or production at very low cost and make maximum profits.
Opportunities cost is play an importance type cost concept which provides lots of benifits to buisness decision makers. Buisness decision makers able to identify those cheapest source of cost which further can use as input cost.
As we know when input cost become reduced then cost of production also become less. This will create larger profits to any business decision makers.
In opportunity cost concept buisness decision makers able to evaluate different sources of cost and then take properly decision which source of cost are to be considered as input cost.
Good knowledge of opportunity cost make any business profit increase at high rate.
Opportunity cost with formula
Lets understand more about opportunity cost with help of statistical analysis formula. We can calculate opportunity cost with the help of given below formula.
Opportunity cost (OC) = FO - CO
Where,
FO = Return on foregone option
FC = Return on selected option
Opportunity cost from statistical formula defined as it is a difference between returns on foregone option and returns on selected option.
Formula tells investors to understand opportunity cost as difference of return which he will get from options of investment.
In production economics opportunity cost play an important role in building capital structure. Opportunity cost meaning in economics that all profit and loss enjoyed by company over next year.
Opportunity cost concept formula used by investors, business decision makers and individuals to calculate rate of return on investment which they will get. Statistical formula used to calculate return on investment given below
Return On Investment (ROI) = Current price - cost of the investment / cost on investment
Lets take help of opportunity cost example to understand role of opportunity cost in building capital structure. Suppose company issue debt and equity capital to satisfy lenders and shareholders on their investment risk.
Funds which are used which are used for repayment of loans can not used for investment on stock market.
Investment on stock market have opportunities to generate higher return over next year. Company have to decision with help of opportunity cost concept wheather to go with leveraging debt generated high profit or go through with making investment.
Formula of opportunity cost provide various types of options for investors, individual and buisness decision makers to select accurate option which is suitable according to their requirements (buisness and investments).
Opportunity cost examples
Lets understand opportunity cost formula with help of an example. Suppose you invested earlier money in stock market and going to get return of 16 percentage over next financial year, whereas your company expected to generate return 18 percentage from company new equipment over next year.
From opportunity cost formula we can choose company equipment over stock market. Calculation of opportunity cost given below
Opportunity cost = (18 - 16)%
Opportunity cost = 02%
Here from after statistical treatment of opportunity cost you clearly get 2 percentage extra higher return in comparison to stock market.
Buisness decision makers when taken decision to start new business work. Then before starting buisness decision makers make research on particular buisness topic it's pros and corn of financial decisions may be going to reflect in future.
Every day it become little hard to take decision every time thinking potential of opportunity cost concept. Many times buisness decision makers buy things without thinking about opportunity cost concept. Due to this neglecting of opportunity cost concept results in missing other opportunities of investment and which option left alone.
Types of opportunity Cost
In production economics there are two types of opportunity cost such as implicit cost and explicit cost.
Implicit cost is a type of opportunity cost which are deals with importance of opportunity cost but not involved money payment. Implicit cost is type of opportunity cost do not involved transaction activities.
Explicit cost is an important type of opportunity cost which deals with two activities transaction activities and money transfer activities.
Major key difference between implicit cost and explicit cost is implicit cost do not involved transaction and payment activities. Whereas explicit cost involved transaction and payment activities.
Is opportunity cost real cost
Opportunity cost do not included in balance sheet and opportunity cost don't tell us about company present buisness situation. According to these explanation we can say that opportunity cost not a real cost.
But if we look economically way then opportunity cost become more real. Because many investors, individual and buisness decision makers fails to execute opportunity cost concept in day to day decision making in buisness. Not taking seriously in business activities results in making buisness into loss.