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What is Opportunity Cost?
Malcolm Tatum
Malcolm Tatum
Opportunity cost has to do with what it costs a company to produce goods or services in terms of what could have been earned by using those same resources to produce different goods or services. Essentially, opportunity cost is all about comparing one production option to another production option. This involves determining the value received from one going with the production of one option versus what could be earned by choosing to go with a different option, using the same raw materials.
Opportunity costs can be understood by thinking in terms of the various products that can be made with the same basic materials. For example, corn is a common food commodity. The corn may be processed and sold in cans, or prepared with a slightly different process and sold in frozen packages. Alternatively, the corn could be ground into meal and packaged in sealed bags. The seller would want to investigate the relative merits of producing each product type from the same commodity, and compare the cost involved with choosing one line of production, or opportunity, over the other two.
In calculating true opportunity cost, it is important to look at several aspects of economics. First, there is the production cost involved with each production option. Second, there is the matter of storage costs while the finished goods await sale. Last, there is the scarcity of the raw materials and what impact availability has on the final and real cost for the materials. While other factors also apply, any economist will include these three factors in assessing the output foregone by choosing one type of production over another.
Opportunity cost can apply to many different situations. The materials involved may include land, labor, working capital, or any type of food commodity, including beef or fish. Generally, the idea behind calculating opportunity cost is to provide guidelines for the most efficient use of materials so that the greatest amount of profit is returned from the venture.
Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
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Malcolm Tatum
After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including WiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.
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![Opportunity cost is all about comparing one production option to another production option.]()
By: gemenacomOpportunity cost is all about comparing one production option to another production option.
Discussion Comments
My sister makes jewelry for a living, and she often has to make decisions based on opportunity costs. She uses the same wire, beads, and jewels to make earrings, bracelets, and necklaces, so she has to base her decisions about which to make more of on how good certain items are selling.
It is hard for her, because there are items that she loves to make that don't sell too well, so she has to think logically and give up on them. She could use the material for something else that would make her a profit, and even though she might have to sacrifice artistic fulfillment, she will see a better result if she does this.
Also, every time she tries making a new item, she is taking a risk. She is pulling from the same stockpile of materials that she uses to make popular items, so she will lose a little bit of money if they don't sell.
This may not meet the normal opportunity cost definition, but I often have to consider how my own work time would be best spent. I could either work on my acrylic paintings that I plan to sell, or I could do my freelance graphic design work, which would result in immediate money.
The thing that I struggle with is that if I choose to invest time in the paintings, I also invest money in the form of time lost at my “sure thing” job. I can't know for certain that I will ever sell a painting, so it is a gamble.
However, if I were to get the paintings finished and sell them, I would get considerably more money than I could make at my freelance job. The initial investment of time and lost income would be required, but if I never do it, I will never know if I could have made the money.
@anon32864, opportunity cost can best be defined as the cost of trying to do something, or the cost of taking an opportunity. That might not sound any different from a term like "general expenses", but the difference is that there will always be some sort of opportunity cost no matter how much you can limit and challenge yourself to save money in different ways. Another difference is that people often will see the opportunity cost as a small amount needed to make a much larger amount later.
How is opportunity cost different from other costs?
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