Opportunity Costs
Opportunity costs stem from trade-offs that exists as a result of scarcity of resources. It is necessitated by decisions to make choices between one or several options that must be given up for one alternative to prevail (Bouman, 2011). Opportunity cost in economics is the costs of the opportunity missed as a result of the alternative given up. It can be expressed in monetary terms or in any other terms of time and it includes both implicit and explicit costs (Mankiw, 2014).
The opportunity costs of watching Good Times are the costs that would be forgone as a result of the choice made to watch Good Times in concert. The alternative costs of watching Good Times are watching the Hot Stuff that basically costs $150 as the entry fee besides the time required to drive to the concert. The implicit and explicit costs of watching Hot Stuff have been valued at $225 while other costs include the hours needed to drive to the location to watch the Hot Stuff concert.
Since the explicit costs have been estimated to be $150 then the implicit costs would be $225 – $150 which equals to $75. The opportunity cost of watching Good Times can be estimated to be $75. But the cost of the hours that would be forfeited in case of travelling to watch the Hot Stuff would also have to be considered. The hours required to prepare for the exam are also valuable and the choice of watching Good Times means that those valuable hours would be saved. The opportunity costs of watching Good Times is watching Hot Stuff.
Opportunity-cost analysis has a lot of practical applications in business operations as long as scarcity of resources exists. The value of the next second best alternative must be considered when deciding the product to be rolled up from the factory. Opportunity costs are never reflected on the Balance Sheet nor in the income statement but the costs are real and must be considered (Mankiw, 2014). The only problem is that quantifying opportunity costs is rather difficult as it relates mostly future events besides most people overlook it (Waggoner, n, d).
To conclude, the opportunity costs of making any decision is literally what is given up as a result of the decision. Opportunity costs are made up of implicit and explicit costs. In economics, profits are calculated based on opportunity costs while in accounting, only explicit costs are used. It is worth noting that opportunity costs is the value of the best alternative, for example the opportunity costs of going to college would be the wages that may have been earned, or the value of the experience that would have been gained or the value of all the activities that one may have missed while studying, or the money paid for tuition or the interest that would have been earned.
The opportunity cost is the value of one alternative not the value of all the aggregate hence the opportunity costs would be one of the most valuable alternative listed. Due to scarcity, resources are limited and only one alternative among many others must be selected. Either the time or the income is always limited due to scarcity hence the opportunity cost in economics is the costs of the opportunity missed as a result of the alternative given up.
References
Bouman, J. (2011). Principles of Microeconomics, Columbia, Maryland.
Mankiw, N. G. (2014) Principles of Economics, Cengage Learning
Waggoner, D. (n, d) Opportunity Costs retrieved July 5, 2016 from http://www.referenceforbusiness.com/management/Ob-Or/Opportunity-Cost.html
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