What’s the cost of opportunity?

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Opportunity cost has to do with how much it costs for a business to produce goods or services in terms of what could have been earned by using those same resources to produce different goods or services. In essence, opportunity cost is the comparison of one production option with another production option. This involves determining the value a person receives by producing one option versus what could be earned by choosing to choose another option, using the same commodities.

Opportunity costs can be understood by thinking about the various products that can be made from the same basic materials. For example, corn is a common food product. Corn can be processed and sold in cans or prepared in a slightly different process and sold in frozen packages. Alternatively, the corn could be ground into flour and packaged in sealed bags. The seller would like to study the relative merits of producing each type of product from the same commodity and compare the costs associated with choosing one production line, or opportunity, versus the other two.

When calculating true opportunity cost, it is important to look at different aspects of the economy. First, there are the manufacturing costs associated with each manufacturing option. Secondly, there is the issue of storage costs while finished products await sale. Finally, there is the scarcity of raw materials and the impact of availability on the final and real cost of materials. While other factors also apply, any economist will include these three factors in assessing the expected outcome by choosing one type of output over another.

Opportunity cost can be applied to many different situations. The materials in question can include land, labour, working capital or any type of food product, including beef or fish. In general, the idea behind calculating opportunity cost is to provide guidelines for the most efficient use of materials so that the majority of profits are returned to the firm.

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