when a decision is made to undertake a particular course of action its opportunity cost

The general rule is that the opportunity cost should not exceed the value of option selected. Opportunity costs are important in decision-making and evaluating alternatives. Decision-making is selecting the best alternative which is facilitated by the help of opportunity costs.

Full Answer

How much should the opportunity cost exceed the value selected?

The general rule is that the opportunity cost should not exceed the value of option selected. Opportunity costs are important in decision-making and evaluating alternatives. Decision-making is selecting the best alternative which is facilitated by the help of opportunity costs.

Why are opportunity costs important in decision making?

Opportunity costs are important in decision-making and evaluating alternatives. Decision-making is selecting the best alternative which is facilitated by the help of opportunity costs. Such costs do not require cash outlays and are only imputed costs.

What do you mean by opportunity cost?

An opportunity cost is the benefit given up or sacrificed when one alternative is chosen over another. It is the income foregone by selecting another alternative. An opportunity cost is the net cash inflow that could be obtained if the resources committed to one action were used in the most desirable other alternative.

What are the costs of an action?

a. only the monetary payment the action required. b. the total time spent by all parties in carrying out the action. c. the highest valued opportunity that must be sacrificed in order to take the action. d. the value of all of the alternative actions that could have been taken. a. monetary costs only. b. non-monetary costs only.

What is the opportunity cost of a decision?

“Opportunity cost is the value of the next-best alternative when a decision is made; it's what is given up,” explains Andrea Caceres-Santamaria, senior economic education specialist at the St. Louis Fed, in a recent Page One Economics: Money and Missed Opportunities.

How does opportunity cost affect decision-making?

Opportunity cost is the value or benefit of an alternative choice compared to the value of what is chosen. The concept of opportunity cost is used in decision-making to help individuals and organizations make better choices, primarily by considering the alternatives.

What does the opportunity cost of an action include?

The opportunity cost of an action is what you must give up when you make that choice. Another way to say this is: it is the value of the next best opportunity. Opportunity cost is a direct implication of scarcity.

What is the opportunity cost of a particular product?

Opportunity cost refers to what you have to give up to buy what you want in terms of other goods or services. When economists use the word “cost,” we usually mean opportunity cost.

How does opportunity cost affect decision-making quizlet?

How does opportunity cost affect decision making? When we make decisions about about how to spend our scarce resources, like money or time, we are giving up the chance to spend money or time on something else. All individuals, businesses, and large groups of people make decisions that involve trade-offs.

What is the opportunity cost of a decision quizlet?

Opportunity cost is the value of the best alternative forgone in making any choice.

What are the types of opportunity cost?

The two types of opportunity costs are explicit opportunity cost and implicit opportunity cost. Explicit opportunity cost has a direct monetary value.

Which of the following is the best definition of the opportunity cost of a decision?

Opportunity cost is defined as the value of the next best alternative. In this case your next best alternative is to get a five-dollar dinner at Burger Joint.

What are explicit and implicit costs?

The main difference between the two types of costs is that implicit costs are opportunity costs, while explicit costs are expenses paid with a company's own tangible assets. This makes implicit costs synonymous with imputed costs, while explicit costs are considered out-of-pocket expenses.

What is marginal opportunity cost?

Marginal Opportunity Cost (MOC) of a given commodity along a PPC is defined as the amount of sacrifice of a commodity so as to gain one additional unit of the other commodity.

What is opportunity cost economics quizlet?

opportunity cost. the most desirable alternative given up as the result of a decision. thinking at the margin. the process of deciding whether to do or use one additional unit of some resource. cost/benefit analysis.

What is the definition of opportunity cost in economics?

In microeconomic theory, the opportunity cost of a particular activity option is the loss of value or benefit that would be incurred (the cost) by engaging in that activity, relative to engaging in an alternative activity offering a higher return in value or benefit.

What is opportunity cost and why is it important?

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

What is opportunity cost simple words?

Opportunity cost is the value of something when a particular course of action is chosen. Simply put, the opportunity cost is what you must forgo in order to get something.

What are the types of opportunity cost?

The two types of opportunity costs are explicit opportunity cost and implicit opportunity cost. Explicit opportunity cost has a direct monetary value.

What is opportunity cost?

Opportunity cost is the forgone benefit that would have been derived by an option not chosen. To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others. Considering the value of opportunity costs can guide individuals and organizations to more profitable ...

Why are opportunity costs important?

Because by definition they are unseen, opportunity costs can be easily overlooked if one is not careful. Understanding the potential missed opportunities foregone by choosing one investment over another allows for better decision-making.

What is the difference between opportunity cost and sunk cost?

The difference between an opportunity cost and a sunk cost is the difference between money already spent in the past and potential returns not earned in the future on an investment because the capital was invested elsewhere. Buying 1,000 shares of company A at $10 a share, for instance, represents a sunk cost of $10,000. This is the amount of money paid out to make an investment, and getting that money back requires liquidating stock at or above the purchase price. But the opportunity cost instead asks where could have that $10,000 been put to use in a better way.

How to determine the potential profitability of an investment?

When assessing the potential profitability of various investments, businesses look for the option that is likely to yield the greatest return. Often, they can determine this by looking at the expected rate of return for an investment vehicle. However, businesses must also consider the opportunity cost of each option.

What is the purpose of a firm incurring an expense in issuing both debt and equity capital?

A firm incurs an expense in issuing both debt and equity capital to compensate lenders and shareholders for the risk of investment, yet each also carries an opportunity cost. Funds used to make payments on loans, for example, cannot be invested in stocks or bonds, which offer the potential for investment income.

What is the purpose of weighting the costs and benefits of issuing debt and stock?

A firm tries to weight the costs and benefits of issuing debt and stock, including both monetary and non-monetary considerations, in order to arrive at an optimal balance that minimizes opportunity costs.

Do financial reports show opportunity costs?

While financial reports do not show opportunity costs, business owners often use the concept to make educated decisions when they have multiple options before them. Bottlenecks, for instance, are often a result of opportunity costs.

What is opportunity cost?

Opportunity Cost is a macroeconomic term that relates to scarcity of resources. Scarcity of resources – be that time or money – means that we have to make decisions about how we use what we have. Because we have to choose, we can only have the benefits of one option, and have to forego the benefits of the other.

What is the benefit of the foregone option?

The benefits of the foregone option are the Opportunity Cost. Or as Bizfinance.com says: “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.

What is opportunity cost?

An opportunity cost is the benefit given up or sacrificed when one alternative is chosen over another. It is the income foregone by selecting another alternative. An opportunity cost is the net cash inflow that could be obtained if the resources committed to one action were used in the most desirable other alternative.

How are opportunity costs measured?

Opportunity costs are often market values. Alternatively, they are measured by the profit that would have been earned had resources been used for the other purpose. For example, choosing to attend college instead of working has an opportunity cost equal to the salary foregone. Further, assume that a manufacturer can sell a semi-finished product to a customer for Rs 50,000. He decides, however, to keep it and finish it. The opportunity cost of the semi-finished product is Rs 50,000 because this is the amount of economic resources foregone by the manufacturer to complete the product.

Why are opportunity costs important?

Opportunity costs are important in decision-making and evaluating alternatives. Decision-making is selecting the best alternative which is facilitated by the help of opportunity costs. Such costs do not require cash outlays and are only imputed costs.

What is a sunk cost?

A sunk cost is the cost that has already been incurred. It is a past or committed cost, cost gone forever. Sunk costs (past costs) are costs that have been created by a decision in the past and cannot be changed once they have been incurred and cannot be avoided (changed) by any decision that is made in the future.

Why are sunk costs never relevant?

Sunk costs are never relevant for decision-making because they are not differential cost. Even though the historical cost of a resource is sunk, the resource can have a cost for decision-making purposes. If a resource can be used in more than one way, it has an opportunity cost.

What is differential cost?

Differential cost is the difference in total costs between any two alternatives. Differential costs are equal to the additional variable expenses incurred in respect of the additional output, plus the increase in fixed costs, if any. This means that differential cost is only the difference in the amount of the two costs. This cost may be calculated by taking the total cost of production without the additional contemplated output and comparing it with the total costs incurred if the extra output is undertaken.

What is relevant cost?

Relevant Cost: Relevant costs are those future cost which differ between alternatives. Relevant costs may also be defined as the costs which are affected and changed by a decision. If a cost increases, decreases, appears or disappears as different alternatives are compared, it is a relevant cost.