Are you confused about What Are Opportunity Costs? Are you a student of Finance and want to get an understanding of opportunity costs? Then read our best guide on opportunity costs and increase your knowledge. Have you ever had limited money, then thought about several alternatives in spending? For example, when your money is only Rs. 3,000, and you are very starving. You have the choice to eat chicken noodles on the way to the house and then take the bus, or drive a car through an online application and then eat dishes in your own home. Whichever you choose, will generate opportunity costs.
What is Definition of Opportunity Costs?
What Are Opportunity Costs? In daily life or business that is being undertaken, there must be the opportunity cost. It is the cost that arises due to the act of selecting one of the best alternatives available. This cost is reasonable because every day, people must be required to make priorities.
If someone has limited funds to buy goods A or B to meet their needs, then he must consider which is better. If you end up choosing to buy item A, then not owning item B is the opportunity cost that must be sacrificed for that choice. Means you get something by giving something in return.
The Characteristics of Opportunity Costs
In every choice there must be scarification. This sacrificed stuff is what indicates opportunity cost. There are several opportunity costs that you need to know about, including the following:
1.Opportunity cost is not related to money
Absolute opportunity cost calculation is done so that you can still make the best decision when there are many choices that can be taken. Which choice is the most promising, will change the path of your business or life. What needs to be understood, opportunity costs are not always in the form of money. There is also a form of time, pleasure, and so on.
2.Opportunity cost Depends on situation & purpose
When making decisions regarding opportunity costs, do not always use mathematical calculations alone. There are also decisions that must be taken even though mathematically there are fewer benefits. But the decision is still more interesting to take because of psychological factors. Quite simply, opportunity costs can arise because there are decisions made according to the situation and purpose.
3.Opportunity costs and Secondary Needs
Opportunity costs usually arise when it comes to secondary or tertiary needs. Simply because, in the case of primary needs, all must be fulfilled. So there is no primary need that can be sacrificed. While in personal or business secondary requirements, there are many secondary and tertiary needs that can be chosen.
4.Opportunity costs in Organizations and Companies
In an organization, examples of opportunity costs can arise when going to hold a concert, and choose a place for organizing. There is a choice of place A that is not too broad with a rental fee of like Rs. 200,000. On the other hand there is place B which is wider with a rental fee of Rs. 500,000. Each place has different facilities and various policies.
Choosing Lowest Opportunity Costs
Every factor must be well considered, so that the opportunity costs that arise can be borne by the organization. By choosing the best option, the business will get more benefits in organizing the concert. Organizational management need to discuss which is the lowest opportunity cost to be the first choice.
The second example is a business development fund owned by a company. A company with a fund of Rs. 1 million must start thinking about buying sophisticated machines to make work easier, or hiring experts to create their own machines that suit their needs.
If you choose to buy a machine, it is certainly more practical. But no innovation will occur, and the cost of Rs. 1 million may only be enough for a limited number of machines. Meanwhile, developing your own engine could be more efficient. But this requires a long research and also time. Therefore, business management must think about well, which is more effective and efficient for the company.
These costs can make the process of success very fast. We can grow our business fast when we know how to calculate best opportunity cost?