Opportunity cost refers to the cost of overlooking an activity over another. It involves foregoing one item for another. It involves sacrificing a good opportunity that is available to an individual for another. Opportunity cost often involves choosing one alternative or item from a range of mutually exclusive alternative.
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According to Surhone, Timpledon and Marseken, opportunity cost is an economic concept that measures the cost of a choice made by an individual in terms of the alternatives available to him or her (2010). Thus, opportunity cost is the cost of the next best alternative that is foregone during consumption of goods and services or when using economic resources. Opportunity cost is derived from two important economic concepts, namely scarcity and choice. Mankiw explains that opportunity cost is not restricted to items that have monetary values only, but also includes other non-financial items that have the capacity to bring satisfaction to the consumer or user (2011). Any item that has utility or value to the user has an opportunity cost. In everyday life, individuals are faced with various challenging situations that require them to make decisions that involve foregoing one opportunity to another.
In this paper, I will illustrate a recent case in which I was forced to make an opportunity cost decision. The decision I made was further restricted by budget constraints since there were few funds available at my disposal.
When schools closed for summer holidays last year, I got a part-time job ina nearby grocery store. I worked for three months and earned three hundred US dollars. As a teenager, I had numerous items that I have longed to buy. I wanted to buy an iPod which would cost two hundred dollars, a Sony DVD-Player costing two hundred and fifty dollars and a mini-laptop which would cost three hundred dollars. Similarly, I wanted to go for a holiday trip with my classmates which would cost two hundred dollars. After a lengthy discussion with my mother, I realized that I could not afford all these items because I had less money. She advised me to choose only one item. Faced with the dilemma of which item to choose and which ones to ignore, I finally decided to buy the iPod for two hundred dollars and saved the rest of the money in my bank account to earn more interest.
In my opinion, this case best depicts opportunity cost concept backed by budget constraints. I had less money so I had to forego some of the items that I wanted to buy. For example, I lost the opportunity to go for the holiday trip at the expense of buying the iPod. Similarly, I could not reap the benefits of having a mini-laptop because I preferred the iPod to it. Not having a mini-laptop was the opportunity cost in incurred for buying the iPod and saving some money.
I would conclude that the concept of opportunity is often applied by individuals in their everyday decision-making processes. Furthermore, the concept has been widely used in making consumption decisions especially when choosing between two or more products to purchase for individual or organizational consumption. The concept of oppoortunity cost has also been used by manufacturing firms in deciding the types of products to produce and their respective quantities of production in order to maximize utility from organizational resources such as labor and machine hours. A firm that is considering to acquire additional capital through borrowing from lending institutions may also apply the concept of opportunity cost before deciding on which source of borrowed capital to use. For example, a firm may prefer to borrow capital from its shareholders through financial securities such as bonds, debentures or shares other than direct borrowing from commercial banks which may charge higher interest rates.
Similarly, the concept has been widely used by students in making career decisions. For example, a student may have to choose between taking a course in civil engineering and electrical architecture. In such a case, even though the student may be fully qualified to take any of the courses, he or she must forego one and choose the other. Either way, the choice that the student makes involves foregoing certain benefits associated with one alternative and choosing to take or “consume” the benefits associated with another alternative.
As it can be seen in the above case I personally encountered as well as in the examples I have given, opportunity cost is an economic concept that we apply in our daily lives, either consciously or unconsciously. Through opportunity costs, people often tend to maximize the utilities or benefits that they derive from using particular products or scarce economic resources.