Opportunity Cost

By Saherah Luhnat Noor, EconoHeart

Imagine you have some dollars and you want to buy a subscription service with them. You like to buy maybe Netflix or Spotify or anything you wish. For simplicity, let's consider the two options Netflix and Spotify, both which you love to get. But here's the thing: you only have enough dollars to buy one subscription at present time. So, you have to make a choice between either Netflix or Spotify.

The opportunity cost is the one that you didn't choose to buy, the one that you gave up when you decided to buy the other. So, if you choose to buy Netflix, the opportunity cost is Spotify because you can't buy it anymore.



Opportunity cost is the fundamental economic concept of the value of the next best alternative forgone when making a choice. It highlights the inherent trade-offs individuals, businesses, and societies face when allocating scarce resources among competing uses.

When making decisions, there are always multiple options available. But sometimes due to limited resources, only one or few options can be pursued at a given time. The opportunity cost is the value of the alternative option sacrificed or foregone in favor of the chosen option.

Let's illustrate this concept more. Consider a business owner with a limited budget who wants to invest in a new marketing campaign or purchase additional equipment. If the owner decides to invest in the marketing campaign, the opportunity cost would be the benefits or potential returns associated with investing in the equipment.

Opportunity cost is not limited to financial or monetary considerations; it encompasses a broader range of factors such as time, effort, and alternative uses of resources. Someone deciding to pursue a graduate degree full-time must consider the opportunity cost of potential income that is missed during the period of study, as well as the potential career advancements that may have been achieved if he or she had entered the job sector immediately.

Understanding opportunity cost is crucial for making informed decisions in both personal and economic contexts. Such decision-making can assess the relative value and make choices that maximize the overall welfare or desired outcomes. When we make a decision, there are things we can't do or have because we chose something else. Hence it's quite important to think about what we're giving up when we make choices.

Comments

Post a Comment

Share your thoughts!

Popular posts from this blog

Deflation

By Saherah Luhnat Noor, EconoHeart
Image
We all know the concept of inflation and its impact, but have you thought about its opposite - deflation? Hilarious as it sounds, this concept also exists as daylight in the economy. Let's delve deeper into it today. Deflation is basically just the opposite of Inflation - a situation where consumers expect prices to fall further in the future. It may feel good in short run, but in reality deflation has more dire consequences compared to inflation. People may delay buying goods and services because they anticipate that they'll be cheaper if they wait. If you expect the price of electronics to drop next month, you might hold off on buying that new IPhone now. When consumers delay spending, it can lead to a decrease in overall demand for goods and services. This reduction in demand can result in lower production levels and job cuts, affecting the overall economy. There's a term called Deflationary Spiral, a particularly concerning scenario where falling prices lead to falling ...
Read more

Mathematical Economics

By Saherah Luhnat Noor, EconoHeart
Image
Mathematics, like every other branch of subjects, is ingrained into economics too. In fact, many large-scale concepts and principles can be well explained with this. Let's explore it briefly in today's blog. Mathematical economics is a branch of economics that mainly relies on mathematical models and methods to analyze economic problems and derive solutions. A range of techniques like calculus, linear algebra, matrices, graphs etc, is employed in them. You may already saw in previous blogs how we tend to use some maths to explain a theory or topic. It's main goal is to represent economic theories and relationships in a formal and mathematical way. This allows economists to analyze economic behavior, make predictions, and develop policies more rigorously and systematically. If you grasp it well, you can derive precise, quantitative predictions about how individuals, firms, and governments will respond to changes in economic conditions, policies, and other factors. It can be ...
Read more

Elasticity of Prices

By Saherah Luhnat Noor, EconoHeart
Image
Elasticity is one of the very basic concept of Economics and helps to understand how consumers (also called buyers) and producers (also called sellers) react to price changes, making it a crucial concept for pricing strategies and understanding how an economy behave. There are various types of elasticity, but for now we'll see the price one, having two main types: price elasticity of demand and price elasticity of supply. Price elasticity of demand is how much people change the amount they want to buy when the price changes. If something is "elastic," people are very sensitive to the price, so if the price of that item goes up, they'll buy less of it or look for alternatives that cost lesser. And if it's "inelastic," people will still buy the same amount no matter how much the price changes. A good example of inelasticity is medicines. Doesn't matter their prices go up or down, you'll still need to buy to save your health! Now, for elastic demand...
Read more