CandleFocus Glossary Editor
Opportunity cost is an important concept in both economics and business decision making. It allows decision makers to compare scenarios in terms of the yield, cost, or benefit of one alternative over another. Making sound financial decisions can mean the difference between success and failure, and understanding how opportunity cost works can help decision makers make well-informed decisions.
The concept of opportunity cost states that every action a person, business, or government takes has a cost associated with it and a benefit or gain associated with it. The cost of the chosen action consists not only of the tangible cost, like the money invested in a project, but also the costs associated with giving up other potential opportunities. The benefit of the chosen action consists of the tangible benefit, such as money earned or saved through an action, as well as other potential benefits that come with it, such as increased reputation or increased customer base.
For instance, if a company chooses to invest in a new manufacturing plant in Los Angeles, the tangible cost of this decision would be the actual cost of the materials, labor, and other expenses associated with the project. The intangible cost, or opportunity cost, would be related to the money not put towards the competing project in Mexico City. The benefit of the chosen project would be the upper hand the company would gain in the market when their products are produced in the US. The intangible benefits could be better customer relationships or increased customer loyalty.
All of these costs and benefits must be considered and weighed against each other to assess the true opportunity costs of any given project. The key to properly evaluating opportunity costs is to consider the value of the foregone action - the next best alternative to the chosen action.
The understanding of opportunity cost is essential to sound decision-making. It can help decision makers to choose wisely and make profitable decisions that best fit the specific context of their company or project. By fully understanding their options, measuring the tangible and intangible costs, and evaluating the foregone alternative, decision makers can hone in on the decision that will most benefit them in the long run.
The concept of opportunity cost states that every action a person, business, or government takes has a cost associated with it and a benefit or gain associated with it. The cost of the chosen action consists not only of the tangible cost, like the money invested in a project, but also the costs associated with giving up other potential opportunities. The benefit of the chosen action consists of the tangible benefit, such as money earned or saved through an action, as well as other potential benefits that come with it, such as increased reputation or increased customer base.
For instance, if a company chooses to invest in a new manufacturing plant in Los Angeles, the tangible cost of this decision would be the actual cost of the materials, labor, and other expenses associated with the project. The intangible cost, or opportunity cost, would be related to the money not put towards the competing project in Mexico City. The benefit of the chosen project would be the upper hand the company would gain in the market when their products are produced in the US. The intangible benefits could be better customer relationships or increased customer loyalty.
All of these costs and benefits must be considered and weighed against each other to assess the true opportunity costs of any given project. The key to properly evaluating opportunity costs is to consider the value of the foregone action - the next best alternative to the chosen action.
The understanding of opportunity cost is essential to sound decision-making. It can help decision makers to choose wisely and make profitable decisions that best fit the specific context of their company or project. By fully understanding their options, measuring the tangible and intangible costs, and evaluating the foregone alternative, decision makers can hone in on the decision that will most benefit them in the long run.