Quick Answer: Define The Term Opportunity Cost. How May This Cost Be Relevant In A Make-or-buy Decision?

What is an opportunity cost and why is it a relevant cost?

Opportunity cost. Relevant costs may also be expressed as opportunity costs. An opportunity cost is the benefit foregone by choosing one opportunity instead of the next best alternative. Example. A company is considering publishing a limited edition book bound in a special leather.

How does opportunity cost affect make or buy decision?

In business, opportunity costs play a major role in decision-making. If you decide to purchase a new piece of equipment, your opportunity cost is the money spent elsewhere. Companies must take both explicit and implicit costs into account when making rational business decisions.

What is the definition of opportunity cost give an example?

When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can’t spend the money on something else.

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Is an opportunity cost always relevant?

An opportunity cost is a benefit given up by choosing one alternative over another. Opportunity costs are ALWAYS RELEVANT. Add to avoidable costs (add to making costs, for ex).

What is a real life example of opportunity cost?

The opportunity cost is time spent studying and that money to spend on something else. A farmer chooses to plant wheat; the opportunity cost is planting a different crop, or an alternate use of the resources (land and farm equipment). A commuter takes the train to work instead of driving.

What is the importance of opportunity cost?

The concept of Opportunity Cost helps us to choose the best possible option among all the available options. It helps us to use every possible resource tactfully, efficiently and hence, maximize economic profits.

Why is opportunity cost not the same for all individuals?

Individuals face opportunity costs in both economic and non-economic decisions. Every decision we make essentially means giving up other options, which all have a value.

How does opportunity cost affect your life?

Opportunity costs can impact various – and critical – aspects of your life, including money, career, home and family, and other lifestyle elements. In general, it means having to choose one option over the other, be it money, time or lifestyle choices – and living with the consequences.

How is the concept of opportunity cost applicable in our daily life?

In daily life, opportunity costs are the benefits or pleasures foregone by choosing one alternative over another. For instance, if you decide to spend money eating out for dinner in a restaurant, then you forgo the opportunity to eat a home-cooked meal.

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What are three types of opportunity cost?

Three phrases in the definition of opportunity cost warrant further discussion–alternative foregone, highest valued, and pursuit of an activity.

What is opportunity cost in decision making?

“Opportunity cost is the cost of a foregone alternative. If you chose one alternative over another, then the cost of choosing that alternative is an opportunity cost. Opportunity cost is the benefits you lose by choosing one alternative over another one.”

What are the three examples of opportunity cost?

Examples of Opportunity Cost

  • Someone gives up going to see a movie to study for a test in order to get a good grade.
  • At the ice cream parlor, you have to choose between rocky road and strawberry.
  • A player attends baseball training to be a better player instead of taking a vacation.

What kind of cost is never relevant?

Sunk costs are those costs that happened and there is not one thing we can do about it. These costs are never relevant in our decision making process because they already happened!

Are all future costs relevant in decision making?

Relevant costs are those costs that will make a difference in a decision. Future costs are relevant in decision making if’ the decision will affect their amounts. Relevant costs are future costs that will differ among alternatives.

What will always be a relevant cost?

Only fixed costs will be relevant. Both variable and fixed costs will be relevant. Both variable and fixed costs will be relevant.

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