A student spends three hours and $20 at the movies the night before an exam. The opportunity cost is time spent studying and that money to spend on something else. A farmer chooses to plant wheat; the opportunity cost is planting a different crop, or an alternate use of the resources (land and farm equipment).
When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can’t spend the money on something else.
Subsequently, What is opportunity cost explain with numerical example?
Explain with the help of a numerical example. An opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. … However if company’s return is only 3% when we could have made a return of 9% from FD, then our opportunity cost is (9% – 3% = 6%).
Also, What is an example of an opportunity cost?
Examples of Opportunity Cost. Someone gives up going to see a movie to study for a test in order to get a good grade. The opportunity cost is the cost of the movie and the enjoyment of seeing it. … The opportunity cost of taking a vacation instead of spending the money on a new car is not getting a new car.
Is opportunity cost a number?
There is no specifically defined or agreed on mathematical formula to calculate opportunity cost, but there are ways to think about opportunity costs in a mathematical way. Opportunity cost is the value of the next best alternative or option. This value may or may not be measured in money.
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What is opportunity cost easy definition?
Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. The idea of opportunity costs is a major concept in economics. Because by definition they are unseen, opportunity costs can be easily overlooked if one is not careful.
What is opportunity cost explain with example?
When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can’t spend the money on something else.
How do you determine opportunity cost?
The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. Say that you have option A: to invest in the stock market hoping to generate capital gain returns.
What is opportunity cost Class 11?
What is Opportunity Cost? Opportunity cost in economics can be defined as benefits or value missed out by business owners, small businesses, organization, investors, or an individual because they choose to accomplish or achieve anything else.
What does opportunity cost include?
Summary: The opportunity cost of any decision is what is given up as a result of that decision. Opportunity cost includes both explicit costs and implicit costs. … Accounting profits are calculated using only explicit costs. Therefore, accounting profits are higher than economic profits.
What factors go into the opportunity cost of a decision?
Opportunity costs can impact various – and critical – aspects of your life, including money, career, home and family, and other lifestyle elements. In general, it means having to choose one option over the other, be it money, time or lifestyle choices – and living with the consequences.
Is opportunity cost always positive?
Opportunity cost represents the cost of a foregone alternative. … Opportunity cost can be positive or negative. When it’s negative, you’re potentially losing more than you’re gaining. When it’s positive, you’re foregoing a negative return for a positive return, so it’s a profitable move.
What is a PPF in economics?
In business analysis, the production possibility frontier (PPF) is a curve that illustrates the variations in the amounts that can be produced of two products if both depend upon the same finite resource for their manufacture. PPF also plays a crucial role in economics.
What is the basic idea of opportunity cost?
The idea behind opportunity cost is that the cost of one item is the lost opportunity to do or consume something else; in short, opportunity cost is the value of the next best alternative.
What is opportunity cost and sunk cost?
Sunk Cost. The difference between an opportunity cost and a sunk cost is the difference between money already spent in the past and potential returns not earned in the future on an investment because the capital was invested elsewhere.
What are three types of opportunity cost?
Three phrases in the definition of opportunity cost warrant further discussion–alternative foregone, highest valued, and pursuit of an activity.
What best describes an opportunity cost?
In microeconomic theory, opportunity cost is the loss or the benefit that could have been enjoyed if the alternative choice was chosen. As a representation of the relationship between scarcity and choice, the objective of opportunity cost is to ensure efficient use of scarce resources.
What is an example of opportunity cost for a customer?
Example of Opportunity Cost Yet consumers don’t sit down thinking about this decision for hours or days. These are decisions taken in minutes or seconds. When the consumer buys a Croissant, they forego $2, or however much it costs. The opportunity cost is what could have been brought instead of a Croissant.
What is PPC explain with diagram?
The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated with allocating resources between the production of two goods. The PPC can be used to illustrate the concepts of scarcity, opportunity cost, efficiency, inefficiency, economic growth, and contractions.
Why do we calculate opportunity cost?
Opportunity cost is the comparison of one economic choice to the next best choice. These comparisons often arise in finance and economics when trying to decide between investment options. The opportunity cost attempts to quantify the impact of choosing one investment over another.
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