The Assessment of Opportunity cost
Opportunity cost is the value of the next best alternative in a decision. Imagine that you have $150 to see a concert. You can either see “Hot Stuff” or you can see “Good Times Band.” Assume that you value Hot Stuff’s concert at $225 and Good Times’ concert at $150. Both concerts cost $150 per ticket, but it would take you a couple of hours to drive to Hot Stuff’s concert and you have to be in school (the next) morning for an exam. Good Times’ concert is right here in town. Explain how you would assess the opportunity cost of seeing Good Times in concert. What is the opportunity cost of going to Good Times’ concert?
Develop a response that includes examples and evidence to support your ideas, and which clearly communicates the required message to your audience. Organize your response in a clear and logical manner as appropriate for the genre of writing. Use well-structured sentences, audience-appropriate language, and correct conventions of standard American English.
The concept of opportunity cost shows the basic correlation between choice and scarcity. Resources are scarcely available and hence all demands can not be met. In this regard, a choice has to be made on which demand will be met. Once a choice is made, the value of the forgone alternative results to an opportunity cost. Opportunity cost is the evaluation placed on the most rejected alternatives or opportunities (Buchanan, 1991). Accordingly, economists as well as investors are faced with financial decisions which need evaluation before a financial decision is made. The purpose of this paper is to assess the opportunity cost of two services.
The determination of opportunity costs involves assessment of two costs; explicit costs and implicit costs. The explicit cost involves direct monetary payment for factors of production. Moreover, it also involves payment of goods and services which bring satisfaction to consumer. Such direct costs are purchase price of a product or the cost of purchasing a production equipment. By attending Good time concert, the explicit cost is $75; the difference between the cost of attending Hot Stuff’s concert ($225) and Good Times’ concert ($150).
As it was depicted earlier, implicit costs are costs that do not require a monetary payment. They are indirect losses associated with the use of factor of production. For instance, the use of an equipment that is owned results to an implicit cost of whatever the equipment could have earned in its next best application. This includes pleasure, time or any other benefit which results to satisfaction. In spite of these costs not involving direct payments, they are important considerations in business decisions. In comparison of the two concerts, Hot stuff concert will be happening outside the town and thus time will be used to drive to its location. In choosing to attend Good Times’ concert which is happening in town, the explicit cost is the time taken to travel to Hot Stuff’s concert.
Based on the decision to attend Good times concert, the opportunity cost in monetary value is the transport cost of $75 as tickets to both concerts are priced equally at $150. In addition, the good times concert is in town and hence no need to travel. This creates time as an explicit cost which forms opportunity cost. This time would be used to prepare for an exam the following morning. Furthermore, the Hot stuff concert is not beneficial for a person who is sitting for an exam early in the morning the next day.
Awareness of opportunity costs is very essential in our daily life as everything that we do has an opportunity cost attached to it. In the end, a combination of explicit costs and implicit costs provide a clear rationale for assessing opportunity cost of any economical decision. These two costs have to be factored when making such decisions.
Buchanan, J. M. (1991). Opportunity cost. In The world of economics (pp. 520-525). Palgrave Macmillan, London.
Mankiw, N. G. (2008). Principles of macroeconomics. Cengage Learning.