Opportunity cost is a concept in economics that is very important to understand. In making decisions, we must consider the opportunity cost to ensure that the decisions we make are the best for us and for the organization or business we lead.
In this article, we will discuss what an opportunity cost is, the purpose of an opportunity cost, how to calculate an opportunity cost, and examples of opportunity costs.
What is Opportunity Cost?
Opportunity cost is the value of the best option that must be sacrificed when choosing another option. In other words, opportunity cost is the cost of the best opportunity that was missed when choosing an option.
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For example, if we have IDR 10,000 in cash and we decide to buy a drink, then the opportunity cost is the opportunity to spend that IDR 10,000 on another purchase.
Opportunity costs and actual costs are often confused because they both involve a monetary value. However, these two concepts have significant differences.
Actual costs are costs that must be incurred directly to obtain something, such as paying the purchase price of an item. While the opportunity cost is the alternative cost of the best missed opportunity.
Considering the opportunity cost is very important in decision making. Without considering the opportunity cost, we may make decisions that are neither effective nor efficient.
For example, if a businessman decides to develop a new product, he must consider the opportunity cost, namely the resources and time needed to develop the new product.
Will it be more effective than developing an existing product? Will it generate greater profits than existing products?
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Opportunity Cost Objective
The purpose of considering the opportunity cost is to increase the efficiency of decision making. By considering the opportunity cost, we can avoid mistakes and losses in decision making.
In addition, considering the opportunity cost also helps us in the effective allocation of resources. In business, it can help companies to allocate their resources wisely to generate bigger profits.
How to Calculate Opportunity Cost
Opportunity costs can be calculated using a simple formula. The formula is:
Opportunity cost = the cost of the best option that is passed – the cost of the selected option
For example, if we have a choice between buying a new car or buying a used car, we must consider the opportunity cost of each option.
If a new car sells for IDR 200,000,000 and a used car sells for IDR 100,000,000, then the opportunity cost of choosing a new car is an additional cost that must be incurred, which is IDR 100,000,000.
Factors Affecting Opportunity Cost
There are several factors that affect the opportunity cost, including:
- Alternative choices: the more choices available, the higher the opportunity cost.
- Time: the longer it takes to make a decision, the higher the opportunity cost.
- Resources: the more resources needed to make a decision, the higher the opportunity cost.
- Availability of information: the more difficult it is to get the information needed, the higher the opportunity cost.
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The Example Of Opportunity Cost
Examples of opportunity cost calculation simulations in business can be done by taking the following examples:
A company has two products that can be produced, namely product A and product B. To produce product A, the company must spend Rp. 10,000 and to produce product B, the company must spend Rp. 8,000.
However, production of product A will generate a profit of IDR 15,000 while production of product B will only generate a profit of IDR 12,000.
To decide which product to produce, the company must consider the opportunity cost of each option. If the company chooses to produce product A, then its opportunity cost is the opportunity to make a profit of IDR 12,000 from product B.
Conversely, if the company chooses to produce product B, then its opportunity cost is the opportunity to make a profit of IDR 15,000 from product A.
So, to choose which product to produce, the company must calculate the opportunity cost. The following is a simulation of opportunity cost calculations for both options:
Production of product A:
- Cost of production of product A: IDR 10,000
- Product A profit: IDR 15,000
- Opportunity cost of product B: IDR 12,000
- Total profit: IDR 15,000 – IDR 12,000 – IDR 10,000 = IDR 3,000
Production of product B:
- Production cost of product B: IDR 8,000
- Product B profit: IDR 12,000
- Opportunity cost of product A: IDR 15,000
- Total profit: Rp. 12,000 – Rp. 15,000 – Rp. 8,000 = -Rp. 11,000
From the calculation above, it can be concluded that producing product A will be more profitable than producing product B. Even though the cost of producing product A is higher, the opportunity cost is lower, so the total profit earned is greater.
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Opportunity cost is a very important concept in decision making in the business world and in everyday life. Understanding opportunity costs can help us make more effective and efficient decisions.
By considering the opportunity cost, we can avoid mistakes and losses in decision making. In addition, considering the opportunity cost also helps us in the effective allocation of resources.
Thus the article regarding information about opportunity costs. Hopefully the above article is useful, yes!