Opportunity cost, a term that may be quite foreign to some people. But for those who work in the field of economics or business, of course familiar with this term.
In everyday life, it is not uncommon for us to encounter this term. For example, when the budget is only enough to buy a bag, there are clothes at the same price.
When you choose one of them, it means you have missed one opportunity after another.
This condition is also an example of opportunity cost in everyday life.
For more details, we will discuss what opportunity costs are and examples in the following review.
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Definition of Opportunity Cost
According to experts, there are two definitions of opportunity cost, including:
1. According to the Financial Services Authority (OJK)
OJK defines opportunity cost as income that can be obtained from making choices about investment, other than those previously considered.
Here the opportunity cost arises because
there are other alternatives that are more necessary, or it could also be due to the loss of some sources of funds.
For example, when you plan to invest. Initially, he intended to invest in deposits, but in the end he chose bonds.
You are still investing as originally planned. However, they lost the opportunity to have deposits, because they were more interested in bonds.
2. According to Wikipedia
While quoted from Wikipedia , opportunity cost is the amount of money or costs incurred by people or companies to get what they want.
This is of course different from the daily costs. Because the opportunity cost only appears when you miss one opportunity.
If daily costs are related to tastes as well as different needs. Opportunity cost is more due to factors that give rise to alternative choices.
What causes opportunity costs to occur? Usually due to limited sources of funds, or it could be due to scarcity.
In essence, these costs arise when you have other options than the initial wants or needs.
In simple terms, we can conclude that opportunity costs are costs that arise when you lose opportunities because you meet other needs.
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Characteristics of Opportunity Cost
There are several things that characterize or characterize this opportunity cost. The characteristics of opportunity cost include:
- Opportunity cost calculation is not only related to money. But more to the long term benefits, happiness, free time and others.
- Provides many possibilities that could occur as a result of the emergence of these costs.
- The choice made on the opportunity cost depends on the needs of each person and company.
- These costs are usually related to secondary and tertiary needs of a person or company.
Opportunity Cost Function / Opportunity Cost
In general, opportunity costs have the following functions:
- Help calculate the cost of capital for businesses. Because the opportunity cost gives you the opportunity to consider more maturely.
- Makes it easier to determine priorities in business. Priority in business is needed to avoid the risk of loss.
- Help save business cash. Because with this opportunity cost , you will choose opportunities that are more important and profitable.
- Become the best alternative for your business in setting budgets and decisions related to future business continuity.
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Benefits of Opportunity Cost in Business
With the opportunity cost in business, there are many benefits that you can get. These benefits include:
- Giving you the opportunity to be able to run a minimal risk business with more promising prospects in the future
- Easier to calculate the estimated capital needed to start a business
- Helps determine priorities in business more easily. Because you can compare the possible benefits that can be obtained
- Helps reduce business expenses that are less or not important. This is still influenced by prioritization in your business
Recording costs incurred with online bookkeeping software can be a crucial step for analyzing opportunity costs, so that all choices are made with minimal risk.
It can be seen, it is very clear the importance of calculating opportunity costs for smooth business operations, to help you make the best decision for the company.
An example of Opportunity Cost
To make it easier for you to understand the concept of opportunity cost, consider the analogy example below.
1. Opportunity Cost between Used and Leased
Mr. Eko has a shophouse unit in a relatively productive area to be used as a business field.
He plans to make it a warehouse to stock products because his retail business is growing. But on the other hand, there are those who want to rent the shophouse for 50 million/year.
When Mr. Eko decides to rent out the shop, he will earn 35 million in one year.
However, he missed the opportunity to gain from expanding his business, and at the same time had to find another place to be used as a warehouse.
This is where the opportunity cost arises.
At the time, Mr. Eko experienced limited resources in the form of buildings or shop houses, which required him to choose one opportunity and miss another.
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2. Opportunity Cost of Time Utilization
Edo, who just graduated from high school, received information about a job vacancy with a salary of 3 million. While he also received a scholarship to study S1 majoring in economics.
Here the opportunity cost arises because of Edo’s limited time.
Does he have to work with a salary of 3 million, or go to college with the hope of getting a bigger salary in the next few years armed with a bachelor’s degree.
Basically, when you consider carefully, opportunity costs will provide benefits.
You just have to always remember when it comes to money or fees, then go for the lowest. The lowest cost is known as the alternative cost.
But when it comes to production costs , then you have to choose the one with the highest production.
In conclusion, choose the opportunities that you really need and provide the greatest benefits.
As explained in the benefit points above, opportunity costs will prevent yourself or your business from the risk of loss.
It’s just that this goes back to the considerations and decisions you make.
Therefore, it is important for you to understand this opportunity cost. So that you don’t take the wrong step in choosing opportunities from the many choices you have.
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With this opportunity cost, it is hoped that you will be wiser and more mature in making judgments and decisions.
Any considerations or decisions you make should be based on the following:
- Various possibilities that can arise and the types of options that exist
- Obstacles or problems that may be caused by the opportunities you choose
- Various qualitative factors that can affect these opportunities
- Determination of costs and data to ensure their relevance to the decisions you make
- Evaluation process appropriate to your chosen opportunity or evaluation method as appropriate
- Clear reasons for making a decision or consideration
From the explanation above, we can see that there are many benefits as well as a function of this opportunity cost.
Many companies know this, so they use accounting software for ease of calculation, as a result there are no profit opportunities left behind.
With various functions as well as the benefits provided, use opportunity costs wisely and with careful consideration.
So that these costs can provide maximum benefits, while at the same time fulfilling what you or the company needs.