StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Definition of Opportunity Cost - Essay Example

Cite this document
Summary
The paper "Definition of Opportunity Cost" discusses that business organizations operate with the aim of making a profit and costs play an important role in decisions for optimal profit margins. Decisions are therefore made to derive maximum value from the expenditure. …
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER92.5% of users find it useful
Definition of Opportunity Cost
Read Text Preview

Extract of sample "Definition of Opportunity Cost"

The opportunity cost of a commodity is the perceived cost of an alternative commodity that could otherwise be produced instead of the former item. Different perspectives however exist for the definition of opportunity cost but they revolve around the cost that can be derived from the next best alternative. Ferguson, an economist, for example, defines opportunity cost in terms of resources and as the amount of resources for producing the next best alternative, which is forgone to produce a subject commodity. This establishes the cost of the two commodities as a common measure for determining the sacrificed cost for production. Henderson offers a definition that is closer to cost measure by defining opportunity cost as the “value of the highest-valued alternative” for which resources in production could have been used (Hussain, 2010, P. 158).

Leftwich’s definition of opportunity cost as the value of the foregone options for production in which resources would have been used is also consistent with the focus on the cost of resources in the production of a commodity (Hussain, 2010). It is however important to note that opportunity cost is not the market price of an alternative commodity or the market price of materials that could have been used in the alternative. Commodities that are produced from a similar material may have a relationship between opportunity cost and market cost but this is not always the case because of the subjective nature of opportunity cost (Baumol & Blinder, 2011). Opportunity cost is, therefore, the value, and not necessarily market price, of resources used in a production, which could have been used in the production of the next best alternative production. 

Implicit opportunity cost and explicit opportunity cost

Opportunity cost can be either implicit or explicit and the existence of reward for involved sacrifice establishes the distinction. Explicit costs in opportunity costs are those costs that are incurred for payments, in monetary or otherwise terms, to stakeholders that sacrifice their resources for the production of a commodity. Examples are costs of labor and rent that an entity incurs and pays for its operations into production. The costs identify cash flow that can be quantified from cost drivers. Remunerations can for example be quantified based on several hours worked per employee or unit of production (McEachern, 2013). Implicit costs, in opportunity cost, however, define those costs that do not involve monetary transfer from the producing entity. Examples are owner’s investments in operations such as the time that a business owner spends in an entity’s operations without rewards (Tucker, 2012). Cash flow is therefore the distinction between explicit and implicit costs of opportunity cost.

Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Opportunity cost Essay Example | Topics and Well Written Essays - 500 words - 1”, n.d.)
Opportunity cost Essay Example | Topics and Well Written Essays - 500 words - 1. Retrieved from https://studentshare.org/finance-accounting/1651827-opportunity-cost
(Opportunity Cost Essay Example | Topics and Well Written Essays - 500 Words - 1)
Opportunity Cost Essay Example | Topics and Well Written Essays - 500 Words - 1. https://studentshare.org/finance-accounting/1651827-opportunity-cost.
“Opportunity Cost Essay Example | Topics and Well Written Essays - 500 Words - 1”, n.d. https://studentshare.org/finance-accounting/1651827-opportunity-cost.
  • Cited: 0 times

CHECK THESE SAMPLES OF Definition of Opportunity Cost

Long-Term and Short-Term Interest Rates

In this case, there is scarcity in labor and the opportunity cost is the labor to be offered in other sectors of the economy.... om/business/economywatch/oil-boom-brings-scarcity-workers-small-towns-940025 Chapter 1 terms and definitions: opportunity cost opportunity cost is the forgone alternative cost for another action.... In this case, there is scarcity in labor and the opportunity cost is the labor to be offered in other sectors of the economy....
8 Pages (2000 words) Assignment

Organized crime: an evolving phenomenon that defies precise and clear-cut universal definition

The same objective should underpin efforts to deal with organized crime, but the problem in this sub-discipline of criminology is that there is no universally accepted definition of organized crime.... Even in the US and Russia, which both grapple with the largest organized problems in the world, there is as yet no legal definition of organized crime (Finckenauer & Voronin, 2001).... All these represent a lax definition of organized crime that may inhibit action by the state or civil society....
12 Pages (3000 words) Essay

Opportunity Cost

In this essay, various examples have been used to substantiate the Definition of Opportunity Cost which is the value of the sacrificed alternative in favor of the decision or choice made.... hen making important decisions regarding resource allocation in business, the important issue of opportunity cost arises.... It may be decided that instead of purchasing the vehicle, due to its vulnerability to risks and expenditure resulting from maintenance, the building would be the better alternative and as such, the aspect of opportunity cost arises, which would be the vehicle....
7 Pages (1750 words) Term Paper

Terms comparison paper

n health care, the concept of opportunity cost is best exemplified by the number of years in terms of lives saved and the improvement in the quality of life should monetary resources be spent on an alternative medical intervention suggested or recommended for a diagnosed health care procedure.... To use a practical application, for a consumer who decided to buy a television set, the opportunity cost could be the value of a trip to a nearby beach resort which was not taken due to the purchase....
4 Pages (1000 words) Essay

Oppurtunity cost on economics

This paper provides various scenarios in which opportunity cost may arise. ... The lost rents are part of the opportunity cost of his production.... This market price is the opportunity cost.... here are many examples of opportunity costs in economics.... ?? Varian (1999, p327) went on to give the following example which will enable a better understanding of opportunity costs: ... The economic definition of profits requires that we value all inputs at their opportunity costs....
4 Pages (1000 words) Essay

Opportunity Cost in the Economics Domain

The video clip that was view and summarized in this paper explains the sense of opportunity cost.... In the in-depth explanation of how to calculate the opportunity cost, Dirk takes his class through an integrated determination of opportunity cost by using empirical figures to clearly and vividly connote the essence of opportunity cost.... These are, scarcity, choice and opportunity cost.... Scarcity is the tendency of the goods and services to be limited in opportunity cost In the economics domain, there are three closely related terms that are used not interchangeably but in tandem to relay economic matters in the best palatable way....
2 Pages (500 words) Essay

Scarcity, Choice and Opportunity Costs

ome economists do not know the exact Definition of Opportunity Cost so sometimes the confusion of understanding what the actual opportunity cost is may occur on and off.... Economists use this term of opportunity cost when referring to that choice that has been made.... If a consumer can buy two goods but chooses to buy one then the concept of opportunity cost does not apply to the scenario.... Even when a person does not pay for consuming a good, scarce resources are used in the production of it and some kind of opportunity cost has been involved in the process....
6 Pages (1500 words) Term Paper

Opportunity cost and Production Possibility Frontier

efinition of opportunity cost ... The concept of opportunity cost according to the economists considers the next highest valued alternative that the individual can choose in order to earn a higher profit (Farole, Rodriguez‐Pose & Storper, 2011).... The concept of opportunity cost refers to the the producers can choose to manufacture goods that are on high demand in the international market.... The concept of opportunity cost refers to the situation when the resources are used for producing a particular product, it reduces the possibility of using them for producing some other product....
7 Pages (1750 words) Coursework
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us