Opportunity cost is one of the primary concepts in economics that refers to the possible advantages that a person, investor, or company forgoes while deciding between two options. In other words, it's the value of the next best option that you didn't choose.
Formula for calculating opportunity cost
Opportunity Cost = FO−CO
FO = Return on best-forgone alternative
CO = Return on the chosen alternative.
Difference between opportunity cost and sunk cost:
A sunk cost is money that has already been spent, whereas an opportunity cost is a potential return on an investment that will not be realized since the capital was put to other uses. Sunk costs are usually disregarded when calculating opportunity costs unless there are particular variable 3lb connected to those funds.
Importance of Opportunity to Businesses and Individuals
- Understanding opportunity cost helps individuals and businesses make better-informed decisions.
- It helps businesses and individuals in resource allocation by comparing.
- Helps to avoid sunk costs.
- Opportunity cost helps businesses maximize their profits by choosing the best investment option available.
- Helps businesses and individuals understand the trade-offs of their decisions.
Primarily, opportunity cost revolves around businesses and individuals weighing the potential benefits of one choice against the potential benefits of another choice. It adds to a business' scalability as it enhances smarter financial decisions.