It is a very powerful concept when someone has to decide to select a particular product or making a choice. In simple words, opportunity cost means choosing or making a best decision from different option. When one has to produce a decision in between various actions to choose only 1 particular work at a time is named opportunity cost.
Example: From a economist viewpoint when a kid has to decide to choose between glaciers cream and chocolate at the same time. When the kid has got a restricted pocket money of $10 only and ice cream cost is $8 whereas chocolate cost is $15. So, the kid must select ice cream only as a child has only limited cash in hand. Additionally it is a good example of scarcity too. On this example, there exists scarcity of money.
"NEEDS" AND "Needs"
According to Macpherson (1977, p. 27) defines needs and wants as "The problem of needs and desires is both an ontological and a historical problem".
The basic necessity to satisfy humans desire is included in needs. Needs are a simple necessity which are being used in daily life like food, drinking water, clothing, medication, shelter etc. A man's survival would depend on these needs only on the primary stage.
In a modern society the essential needs retains on changing according to the society standards. In case there is modern society the essential needs of a man may differ from clothing to electricity, food to jogging normal water, shelter to furniture, medication to digital items etc.
After discussing primary needs, extra needs is the another matter which are would have to be explained. In case of secondary needs the necessity can be regarded as luxury. Like an automobile is a necessity in The United States. As the country grows to advance and development, the luxury too enters need item for the people.
At earlier stage automobiles could be only affordable by wealthy people. But at present, many of the middle level income people are also prepared to cover it. Expansion in a countries market helps someone to go beyond his / her limits.
Wants include needs but it will go beyond that. Before we get deep into "wants", we ought to understand the space between "needs" and "wants". Regarding to Heibroner (1962, p. 135) makes the assertion that "Consumer demand is no more driven to basics but hesitates before a complete selection of possible luxuries and semi-luxuries. "
It means that more recently, consumer demand are unlimited and it's no more situated in a level where consumer use to select between luxury and semi-luxury products. Because of the growth in current economic climate, now most of the middle category people are also prepared to afford luxury products. In a few years back was simply a dream to allow them to afford the price for a luxury product.
It is a stage when the wishes aren't satisfied up to the satisfaction of individuals. When the creation is not enough or sufficient, to gratify the demand for a particular commodity, the situation of scarcity arises.
The scarcity will keep on changing from one society to various countries. As the society keeps on producing, the standard of living also gets higher. The demand also will keep on increasing based on the economy of a country and the satisfactory level of the contemporary society. So, the resources get scarcer to produce goods and services for the satisfaction of wishes.
According to (Pearce, 1983, p. 322) opportunity cost can be defined as "opportunity cost can only arise in a global where the resources available to meet wants are limited so that all wants cannot be satisfied".
In simple words, we could say that the desires and needs of human being are unlimited. But the resources available in the market are limited. And so, it isn't possible to satisfy each and every wants and wishes of human being. And thus, the topic opportunity cost arises in a global.
Choosing the best option when there may be scarcity for a specific product, it could be measured in opportunity cost for the satisfaction of the needs and wishes.
The value of another best alternate which is available in the market is termed in as opportunity cost.
ADVANTAGES OF OPPORTUNITY COST
Opportunity cost offers a good thing about choosing one option over another. It may be personal or business related, opportunity cost arises when we select one option over another considering that the preferred option has better benefits looking at with the another option. It can help one to examine every single facilities and sufficient degree of various products similar in characteristics, when the resources are limited.
Opportunity cost provides us awareness towards finding the right alternate product, which helps one to make fully up to date and also to make appropriate planning and decision making, which really helps to boost ones resources.
Price of a product performs an important role in considering opportunity cost, as it we can consider and compare prices between each alternate product and to select the most reliable and acceptable product from the option.
DISADVANTAGES OF OPPORTUNITY COST
Opportunity cost uses lots of time to determine the features, price, budget, success proportion, acceptable level etc of a product and many times we don't have time to evaluate the benefits of every product to find the best alternatives.
The biggest drawback of opportunity cost from a economist viewpoint is that the ability cost is not considered in accounting process of any business accounts. Therefore, the expense of opportunity involved with an array of a specific product and the choice product which was not selected, can't be taken into makes up about future studies at all from a financial perspective.
PRACTICE OF OPPORTUNITY COST IN REALITY
Opportunity cost is computed everyday by a individual who has the desire to purchase any product available in the market. Whether it may be implicit or explicit cost, it is considered into opportunity cost itself.
An example of opportunity cost in case there is financial sector is as listed below:-
A decision manufacturer must review the impact of opportunity costs deeply prior to making the decision. If we consider a situation of an investor, whether to make investment in stock market or mutual account investment. If a person makes an investment of $20, 000 in Mutual Account Investment of any company for one season, then he feels what if he had put the same $20, 000 in stock market rather than mutual account investment. Perhaps he may expect a go back of 20% on stock, and then your investor has an opportunity cost of $4000. Mutual fund may only give a go back of 10% ($2000).
Then the buyer has to consider the chance taking capacity, if he moves directly with stock market. As currency markets value retains on changing every once in awhile and there is always a threat of losing the amount of money.
In circumstance of mutual finance investment, investor locates it more safe and secure for his money. There is certainly very less potential for losing the amount of money as compared with stock market.
Hence, the trader may take your choice on the best alternative to spend money on after considering the chance cost.
PRACTICES Implemented BY ORGANIZATION WITH REGARDS TO OPPORTUNITY COST
Opportunity cost is very important idea in financial sector. Especially in business improvement related strategies. Opportunity cost helps someone to examine the details and also to make a profitable offer in a small business purchase and providing process. The opportunity cost is the value mentioned to another best choice. When an organization makes a decision to purchase an asset over another, there the organization is transferring the ability cost made available from another asset which was not picked.
From my own inspection on use of opportunity cost in business world, opportunity cost helps the business to control time with completely efficiency.
Opportunity cost helps the business to manage time with full efficiency. Even the business organization has to analysis which effective material should be purchased or not. Evento research the profitability level of various materials before purchasing it. It can help in an improved decision making.
Examples of opportunity cost in Business organization:
A company has $2 million to invest on a job. The business can opt to invest the amount of money for advertisement purpose of the particular product at the time of launch on the market. If they decide to invest the money in production also to buy machinery and everything then the opportunity cost gets lost for advert purpose. And if they decide to spend the amount of money on advertisement goal, then the ability cost would be the organizations ability to create commodity with an increase of efficiently.
Another example for business corporation is that an organization owns a building in which it performs its function and so, it does not need to pay any hire for any office room space and everything. But from economist viewpoint the business enterprise owner may have kept the office space for current use itself or any office space might have given for rent for the money. So, that the owner could have earned from the rent but if the owner won't consider or supply the work place for lease then there is a loss in business expenses regarding to economist view point. However in real life accountant of a business business cannot provide any reduction expenses credited to opportunity cost in virtually any accounts.
Even though opportunity cost is not considered by the accountants in case there is financial accounts and all. But it is very much very important to a supervisor of the business enterprise company to consider opportunity cost in relation to business strategies. An enterprise administrator must consider opportunity cost in determining the opportunity bills in the business for analyzing the profitable deals available for sale. It also helps in utilizing limited resources efficiently.
The value of the next best alternate which comes in the marketplace is termed in as opportunity cost. This means choosing or making a decision from different alternatives. From a economist perspective when a kid has to make a decision to select from glaciers cream and chocolate at the same time. When a child has got a restricted pocket money of $10 only and snow cream cost is $8 and chocolate cost is $15. So, the kid must select glaciers cream only as the kid has limited cash in hand. It is also a better example for scarcity too.
When we talk about "opportunity cost", we must take scarcity, needs and wants also into consideration. As, the basic needs to meet human beings desire is included in "needs". Needs are a basic requirements which are being used in lifestyle like food, normal water, clothing, remedies, shelter etc. A man's survival is dependent on theseneeds only on the principal level.
Saying about "wishes" it includes needs but it runs beyond that. Now a day's consumer needs are unlimited however the resources are limited. It makes the demand margin to get higher, comparing with resource or resources.
"Scarcity" is a level when the needs aren't satisfied up to the mark. When the creation is insufficient to satisfy the demand for a particular commodity the situation of scarcity arises.
Opportunity cost provides a benefit of finding the right option available for sale after concluding the advantages and disadvantages. In addition, it provides consciousness towards choosing a product. From a small business matter opportunity cost really helps to maintain time management to make business decisions.
Even opportunity cost involves limitations like use of lots of time and opportunity cost is not considered by accountants.
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