NAME:- ANKIT ANIL BHATRE

ROLL NO:- 200923

TOPIC NAME :- WHAT DO YOU MEAN BY

OPPORTUNITY COST ?
 I. Meaning of Opportunity Cost

II. Explicit and Implicit Cost

III. Importance of Opportunity Cost

I. Production

IV. Investing

V. Calculation and Example

VI. Conclusion
Meaning of Opportunity Cost:-
Opportunity Cost means the Cost or price of the next best alternative
that is available to a business, company, or investor. The next best
choice refers to the option which has been foregone and not been
chosen. Instead, another option, assuming it to be better, and more
rewarding and fruitful has been selected. In other words, Opportunity
Cost is the Cost of the sacrifice of an available opportunity.
One important thing to keep in mind is the presence and availability of
a feasible “option” to the decision-maker. If there is no option
available, then there is no Opportunity Cost. Further, the available
options should have an economic value. The foregone option may be
a product or a service. These options can be anything- from taking
production decisions to investment decision . Also, they can be
making a purchase decision to even valuing time spent on a particular
activity.
Explicit and Implicit Cost:-

Explicit costs are the costs that a person or an entity

incurs to avail of the benefit of an activity or service or
product. For example, if a producer gives US$50 as labor
charges for a product, the explicit Cost is US$50. It
means that the producer has lost an opportunity to spend
this amount to buy some other product or service.
On the other hand, implicit opportunity costs are the costs
which are notional or implied in nature. They are the costs
of not choosing an available option. For example, the
inherent opportunity cost of setting up a production unit is
the loss of Opportunity of investing the same amount of
money in real estate and selling it after that.
Importance of Opportunity Cost:-

The concept of Opportunity Cost is crucial in the world of

business and finance. It explains the rationale of the
economic decisions taken or chosen with regards to the
other available options.
 Production:-
Opportunity Cost provides a vital direction and guidance while
deciding what to produce. It throws light on the following aspects:
•Opportunity Cost helps a manufacturer to determine whether to
produce or not. He can assess the economic benefit of going for
a production activity by comparing it with the option of not
producing at all. He may invest the same amount of money,
time, and resources in another business or Opportunity.
Therefore, he will be able to decide which option gives him more
returns and to opt for production or not.
•This concept enables a manufacturer to decide what to
produce. The opportunity cost of building a product is the loss of
Opportunity in providing another product. A producer may
choose to go for product A after evaluating the benefits he will
derive if he produces product B.
•A manufacturer may also assess the implicit opportunity cost of
missing out on earning a salary income if he works elsewhere. It
will give a fair idea of how much his time and resources are
worth. Returns from manufacturing and business should be
more than his assessed implicit Cost to stick to his business and
not give up.
Investing:-
The concept of Opportunity cost is essential for making investments
and related decisions.
•The opportunity cost of investing in house/land to avoid paying
rentals may be a necessary factor for every business or
individual. A person has to decide if he is better off by investing
in his land or office space or continue paying rent for the same.
He can compare interest income he can earn from the money he
will spend to buy the property or office space. If it is substantially
more than the rentals he is paying, he can decide not to invest in
land/house.
•The opportunity cost of investing in anything is the Missed
Opportunity of investing in another option. For example, the
opportunity cost of investing in Stock A is the loss of Opportunity
of investing in Stock B or some other asset like gold. An investor
will weigh all his available options and invest in the best possible
option. However, factors like his willingness to take a risk to earn
higher returns, maturity period, etc. will also be taken into
account.
Calculation and Example
Opportunity Cost can simply be calculated by comparing the
financial Cost of the next best possible option that has been
foregone.

The opportunity cost of producing an item for US$10 is the loss

of Opportunity of buying that same item from the market. If that
item is available at US$15 in the market, the producer is better-
off by producing the same. Hence, he will earn a profit of $5. But
if the identical item is available for US$10 in the market, the
producer will have to make a decision. He can continue
production or simply buy the product from the market and sell.
Furthermore, if the same product is available for US$8 in the
market, he can stop producing. Instead, he can buy the product
and sell it.
Similarly, the opportunity cost of investing in Stock A for US$100
will be the loss of Opportunity of investing in Stock B for the
same amount. If stock A rallies to US$150, and stock B remains
the same in value, the investor gains US$50, and his decision to
go for stock A is justified.
Conclusion:-
The world has limited availability of resources like land,
labor, and capital. This scarcity of resources makes it very
important to use a resource most efficiently and achieve
maximum returns. 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.