In decision making process everyone or any concern person can have many options. To achieve something else (assuming best choice is made) we gave up benefits, profit or values of something option as a opportunity cost. Every course of action, choice or decision has an associated with opportunity cost. This article focuses on what is opportunity cost and how to calculate it.
Opportunity cost refers an alternative given up when decision is made.
Opportunity cost is a process of microeconomics, where next best alternative foregone. As per the investopedia “Opportunity cost refers to a benefit that a person could have received, but gave up, to take another course of action.”
Opportunity cost is a simple yet powerful principle that reveals how to make the best economic decisions possible and it explains why people make the choices they do and how to calculate cost based on scarifying or total revenue against the what you gain or economic profit for values
The opportunity cost of a choice is what you gave up to get it. It is always related to benefits and cost for enjoying or as per interest against the lost opportunity.
How to calculate opportunity cost:-
Opportunity cost considers what you are scarifying or total revenue against the what you gain or economic profit for values. It can be measured by two ways
1] For Scarifies:-
Opportunity costs = What you sacrifice / What you gain
2] For businesses or Profit:-
Opportunity costs = Total revenue – economic profit
Example of Opportunity Cost:-
Kumar has two choices to go outside either by bike or by four wheeler but kumar choose the bike because of his own personal interest and enjoy rather four wheeler as he could go in relax in AC. In this way, opportunity cost is the value of the opportunity lost.
Opportunity cost = Relax with AC travelling by four wheeler / enjoyment by two wheeler
If we consider in terms of hours then four wheeler takes 2 hours to cover 90 km distance as bike takes 3 hours
Opportunity cost in hours = 1 hour / 3 hours
So I forgives 0.33 hours as a opportunity cost for my interest and values.