Opportunity Cost

Opportunity Cost – Opportunity cost is an important term in Microeconomics wherein a company has several choices for possible investments. The company has to evaluate and compare the benefits which can be derived from Choice X to that of Choice Y.

If we assume that the best choice has been made, opportunity cost would basically be the cost incurred by foregoing a particular option that would have been the second best choice. This cost plays a pivotal role in making sure that the resource which are scarce are used most efficiently. Further, opportunity costs are not limited to monetary value.

Ads by Google

It may be the real price of the foregone option, the time lost in decision making, or any other benefit associated from the foregone choice. Basically, opportunity cost is not necessarily a tangible cost. It is the value of the second best option. For instance, land purchased by a company to build a mall incurs the opportunity cost of not making a sports centre on same land.

Edited and Updated 08th March 2014

You can leave a response, or trackback from your own site.

Leave a Reply

You must be logged in to post a comment.

Powered by WordPress