Making a choice in favor of something, sometimes you have to give up some other, alternative proposals, choosing the best one. The cost of a product or service that a person refuses to acquire for the sake of buying another is called the alternative cost. Opportunity value is applied in the economy and in ordinary human activities.
Instructions
Step 1
In monetary terms, the opportunity cost is determined by the formula: The choice price is equal to the cost of purchasing the selected option plus the lost income from the rejected option. All this, as a rule, corresponds to one time unit - a year or a month.
Step 2
So if a person can purchase two goods - A and B, equally interesting to him, and still chooses good A for n-amount of money, then the cost of the second good is determined as m and comes to the conclusion that the alternative cost of purchase A will be equal to m. That is, if necessary, it will be possible to buy an alternative product for the calculated price.
Step 3
Opportunity cost is often applied to human activities. For example, when going to a nightclub, the cost of entering the club, food and drinks is calculated and the total amount is calculated. An alternative to the club could be dinner at home - it would cost the person less. This amount is its alternative cost. To this calculation, you can add that the time spent in the club could be devoted to work or household chores.
Step 4
A person who earns 150 rubles an hour should understand that one hour at home or with friends will cost him 150 rubles. This is the opportunity cost of one hour of his life.
Step 5
In fact, opportunity cost refers to the cost of the untapped opportunity. On the basis of the theory of opportunity cost, many factors of economic life are determined: the assessment of investment projects, the analysis of the risks of capital investment, etc. The question of an alternative arises due to the fact that human and economic resources are not unlimited, so a person has to choose those options that seem to him to be the best for a certain period of time.
Step 6
One of the main tenets of economics and entrepreneurship is the thesis that money should be invested in projects that bring the greatest benefit, and it should be invested as long as the income from the project exceeds the opportunity cost of the invested funds.
