Opportunity Cost
Opportunity Cost refers to a benefit that a person could have received, but gave up, to take another course of action. Each choice has an associated opportunity cost. It helps in analysing the effect of business decisions made in terms of finances. The concept can guide you towards more profitable business decisions. Each time you make a decision, there is a certain value that you place on that decision.
Guide for Opportunity Cost
Importance of Opportunity Cost: Opportunity cost embodies the fundamental problem of economics - the problem of scarcity. Since resources are limited, choosing one thing means giving up another. Opportunity cost helps us understand the true value of our choices by considering what we are giving up.
Definition: Opportunity Cost is the cost of forgoing the next best alternative when making a decision. In other words, it's what you are forgoing in order to get what you want.
How it works: It is determined by comparing the cost of the chosen option to the cost of the next highest valued alternative. For example, if you spend time and money going to a concert, your opportunity cost is the time you could have spent enjoying dinner at home, as well as the cost of that meal.
How to Answer Questions on Opportunity Cost in an Exam: Opportunity cost questions often involve considering multiple alternatives and then identifying the cost of forgoing the next best alternative. It requires critical thinking and problem-solving capabilities. Exam Tips: Answering Questions on Opportunity Cost: 1. Understand the question well. Identify all alternatives. 2. Consider the value of each alternative independently. 3. Identify the next best alternative to the one chosen. 4. The opportunity cost is the value of this forgone alternative.
Remember- the more directly the question mentions the need to make a trade-off, the more likely it is that opportunity cost needs to be calculated.
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