What’s the constant opp cost?

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Constant opportunity cost is a situation in which the costs of pursuing a given opportunity do not increase or decrease over time, even though the benefits derived from the activity are expected to change in some way. The term is often used when describing a production process in which the costs associated with the production of goods and services remain the same, while allowing for higher production levels. Typically, this means that the cost of using additional resources to produce more goods does not reduce the cost per unit produced, nor is it more expensive to produce each such unit.

With a constant opportunity cost, the relationship between costs and the number of units produced remains unchanged. This is different from situations where opportunity cost decreases, such as when a manufacturer is able to obtain discounts by ordering more raw materials to use in the production of additional goods, which then leads to a lower cost per unit of production and presumably more profit. per unit as the goods are sold. It is also different from increasing opportunity cost, where the effort to produce additional goods actually results in an increase in the average cost of production per unit produced, a situation which sometimes discourages the creation of additional units.

While often employed in a manufacturing environment, the general idea of ​​constant opportunity costs can also relate to other types of economic and financial situations. For example, if a manager needs to fill a position within a department and has the ability to offer the position to an existing employee with the same level of experience and expertise as the person who recently left the position, this would mean the company should incur no additional expense for filling the position. At the same time, if the job were offered to a new employee who lacked the experience, this would mean dedicating additional resources to train the individual, which in turn would not keep the opportunity cost associated with the business at a constant level.

Determining that a particular business can be operated at a constant opportunity cost may be an indication that it is in the company’s best interest to move forward with that business, rather than choosing an approach that would actually mean higher expenses without creating a corresponding increase in benefits. . In order to determine whether this state actually exists, it is important to identify each cost, as well as each advantage or benefit derived from the activity, determine what additional expenses would be required to increase the activity, then predict any increases in benefits that would be achieved. If the benefits do not justify the additional expense, there is no constant opportunity cost, and the strategy may not be in the best interest of the business or individual in consideration of the business.

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