Oppotunity cost Essay Example | Topics and Well Written Essays - 2000 words

Oppotunity cost - Essay Example The customers may thin k that they are getting a free meal at the cost of a drink and hence more people would be attracted towards the shop. This paper briefly explains the phrase 'TINSTAAFL' in terms of opportunity cost. Opportunity cost is the cost of passing up the next best choice when making a decision. For example, if an asset such as capital is used for one purpose, the opportunity cost is the value of the next best purpose the asset could have been used for. Opportunity cost analysis is an important part of a company's decision-making processes, but is not treated as an actual cost in any financial statement" (Opportunity cost, n. d). Every problem has more than one solution as economics says. While solving problems we normally opt for the best possible solution. But it is not necessary that our decisions would be always the best because of our inability to analyze or evaluate problems properly. If another better option was available, the opportunity cost is the benefits we could have received by taking that option. In the current world, there are lots of investment opportunities. Some of them may be risky while the others might be risk free. For example, consider a person invest his entire extra money in a savings bank account which provides him an annual interest of below 3%. On the other hand, if that person invests his money in fixed deposits, he can earn more than 8% interest. Here the person losing 5% (8 - 3 = 5) and his opportunity costs are 5% In the initial example of the salon owners who offer free lunch, they are not losing any money since they are accommodating the charges of the meals in the charge of the drink. But at the same time they were able to attract more customers because of this business strategy. In other worlds, the salon owners were able to make more profit by selecting an alternate option for selling their drinks. It should be remembered that if the salon owners do not offer any free lunch and function like other shop owners, their sales might be the same as that of the others. But by selecting an alternate option without sacrificing anything, they were able to increase their profit. "Any decision that involves a choice between two or more options has an opportunity cost" (Joanne, 2008)' Characteristics of Opportunity cost Thus the opportunity cost is not restricted to financial costs alone. The real cost of output forgone, lost time, or any other benefit that provides utility should also be considered as opportunity costs. Consider a person with $ 100 in his hand. He can purchase some shirts or some books or even he can invest it in shares or fixed deposits. If he purchases shirts or books for the money he has, the value of the goods may decrease as time passes and he loses his money as opportunity cost. At the same time if he invests the money in term deposits, he may get more money as time passes. In other words the same money yields negative opportunity cost in the first instance whereas it yields positive opportunity cost in the second instance. Opportunity cost is a key concept in economics because of its worth and value in taking decisions. It is capable of describing the economic terms like scarcity and choice and moreover it can establish the relationship between the