Understanding Opportunity Cost and How to Determine It

Rancakmedia.com – So that you can understand more about the meaning of opportunity cost, pay attention and read the article below carefully so that you get more complete information.

To get whatever you want, there is generally a cost that must be sacrificed. These costs are called “opportunity costs” or opportunity costs in fundamental economics. If a need is scarce, everyone will look for alternatives or other possibilities to fulfill it.

In the business sector, this opportunity cost occurs frequently. This happens due to reduced or limited economic resources. Opportunity cost is a term that may be familiar to some people. But for individuals who are interested in the field of economics or business, this word must be familiar to them.

In everyday life, we are often presented with this word. For example, when the budget is only enough to buy a bag, there are clothes for the same price.

When you choose one of them, it means you have lost one chance to catch another. This is a real world illustration of what paying opportunity cost means.

What is Opportunity Cost?

Definition of virgin opportunity cost is choosing one option over another causing a person, investor, or company to lose out on a prospective reward, that is what is meant by opportunity cost.

It may also be noted that opportunity cost is a notion that develops as a consequence of scarcity and the unlimited demands and wants of humans.

What is Opportunity Cost

Because opportunity costs are invisible, they are easily overlooked during the decision-making process. You can dismiss the idea of opportunity cost when running a business or investing.

This helps you make smarter judgments. You have reached decision paralysis when you cannot make a choice because you need to see and weigh all your options in depth before making a final choice.

The costs and benefits of each alternative must balance each other to accurately assess the opportunity cost. Opportunity costs are not only related to profit in the form of money but also include time, effort and usability.

Definition of Opportunity Cost According to Experts

Below are some examples of opportunity costs, according to experts as follows:

According to Paul A. Samuelson and William D. Nordhaus

From the perspective of Paul A. Samuelson and William D. Nordhaus, the conclusion of having an opportunity cost arises from having one scenario in an area of difficulty leading to having to give up something else. In other words, opportunity cost is the monetary value of the biggest loss.

According to N. Gregoru Mankiw

From N. Gregory Mankiw's perspective, the notion of opportunity cost is all you are prepared to lose in order to bet anything.

According to B. Ekelund, Jr. and Robert D. Tollison

Ekelund and Tollison argue that opportunity cost is the cost of not using economic resources meaningfully for a particular purpose, as measured by the amount of profit not made because a person has no alternatives or choices related to trading. produced as a substitute to have alternative options.

Definition of Opportunity Cost According to Experts

According to the Financial Services Authority (OJK)

according to the OJK, the definition of opportunity cost is income that can be obtained from making choices about investing funds, other than what has previously been considered.

Consider investing, as an example. Initially he intended to invest in deposits, but in the end he chose bonds.

You continue to invest according to the initial strategy. However, they squandered the opportunity to deposit in favor of bonds.

Types of Opportunity Costs

There are various kinds of opportunity costs, including the following:

  1. Opportunity costs for consumers will increase when consumers decide on several alternatives for products and services that meet their demands. Because money and options are limited, when everyone's needs are met and they have to choose between different options, this is called an “opportunity cost”.
  2. Opportunity cost for a manufacturer to create a certain type of product or service, and this results in an opportunity cost. In this context, the term "sacrifice" refers to the loss of potential possibilities or benefits that can be obtained through the use of available production resources.

Characteristics of Opportunity Cost

This opportunity cost is characterized by a number of features. Opportunity cost characteristics include:

  1. There are several factors to consider when determining an opportunity cost assessment. More thought should be given to long-term benefits, such as more happiness and free time.
  2. The introduction of these fees opens up a range of alternatives.
  3. Decisions about opportunity costs are based on individual and business needs. Most of the time, these costs to a person or business come from secondary and tertiary needs.

Opportunity Cost Function (Opportunity Cost)

In general, opportunity costs have the following functions:

Opportunity Cost function

  1. Helps calculate the cost of capital because opportunity costs offer you the opportunity to think more carefully.
  2. Facilitate the determination of priorities in business priorities in important business to prevent the danger of loss.
  3. Helping save business cash due to opportunity costs, you are more likely to choose the more important and valuable options.
  4. Be the best alternative for your business when setting a budget and making decisions about future business continuity.

Benefits of Opportunity Cost Calculation

Cost Opportunities are ideas that can help you better understand the world of business, especially when it comes to decision making. Among the advantages of opportunity cost are these additional ones:

Optimizing Potential Opportunities

This idea is all about exploiting the possibilities that exist. Understanding the meaning of opportunity cost properly and precisely will give you greater opportunities. In addition, it also limits decision making that has a detrimental effect.

Getting Business Opportunities with Minimal Risk

Using the idea of opportunity cost lets you analyze and evaluate the many alternative solutions that are most profitable. So, with the least danger, you can make the biggest choice after that.

Sometimes the dangers in running a business or investment are unavoidable. Opportunity cost, on the other hand, directly reduces the potential for harm.

Help Choose Priorities

Creating all the business ideas that you have at the same time will certainly require a lot of money, effort and time. There is also the greater danger of attention being spread so widely.

Using the idea of “opportunity cost”, you can now look at your options and find out which business projects will make you more money.

How to Calculate Opportunity Cost

Every business definitely needs financing, right? Business capital for developing a business is usually not small. Opportunity cost will be taken into account when figuring out how much money you need to start a business.

How to Calculate Opportunity Cost

How to Determine Opportunity Cost

There are two techniques for calculating opportunity costs, which are as follows:

Opportunity Cost = Value Sacrificed (Foregone Option) – Value Obtained (Chosen Option)

Opportunity cost estimation example

The following are examples of opportunity costs, namely as follows:

Opportunity Cost = Value Sacrificed (Previous Option)-Value Gained (Selected Option) (Selected Option)

Optional or alternative numbers can only be used to calculate the formula as above. If you don't have a nominal amount, you can use the opportunity cost theory described below:

Short term or long term, if the FO (Previous Option) is worth more than the CO (Selected Option), you have made a bad decision. Meanwhile, if the FO is smaller than the CO value, then the choice is the best.

Without realizing it, sometimes you come across the notion of opportunity cost in everyday life. The following is an example of an opportunity cost. You can invest in Saving Bond Retail (SBR) or land investment.

SBR10 is issued by the government with a term of two years, annual interest coupon of 5.1%, and tax of 15%. Meanwhile, if you invest in land, you will get a plot of land measuring 10 x 20 meters with an annual profit margin of 4%. Comparison of the two options, namely:

  1. Land prices have gone up in 2 years.
    ((4% x IDR 200,000,000) x 2 years)
    = IDR 16,000,000
  2. The return on investment of SBR010 in 2 years equals
    ((5.1% x IDR 200,000,000) x 2 years)
    = IDR 20,400,000
  3. SBR010 investment after tax return IDR 20,400,000 – (IDR 20,400,000 x 15%)
    = IDR 20,400,000 – IDR 3,060,000
    = IDR 17,340,000

SBR has a higher rate of return on investment of IDR 1,340,000 compared to land investment, as seen in the two previous comparisons. As a result, SBR investments are preferable to those made onshore.

Opportunity costs can lead to optimal judgments when elements such as price, time and effort are addressed. It is important for you or your business to look at two or more good options and weigh the pros and cons of each.

FAQs

Below we have summarized some frequently asked questions about opportunity costs, as follows:

When Do Opportunity Costs Occur?

This opportunity cost is the value of a product, both the lost and most valuable goods or services. Opportunity cost conditions arise when to implement one thing then must make something else happy.

Conclusion

The definition of opportunity cost or opportunity cost shows the potential benefits that are lost or missed by individuals, investors, or businesses when choosing one alternative over the other.

Thus the article about the meaning of opportunity costs and examples, I hope the article above can be helpful and useful for all of you.

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