Opportunity cost: Difference between revisions
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Opportunity cost is a decision criterion for mutually exclusive alternatives. In economics, it is equal to the value of the best alternative | [[Opportunity cost]] is a decision criterion for mutually exclusive alternatives. In [[economics]], it is equal to the value of the best alternative. It means that a decision must be taken if the resulting benefit is higher than its opportunity cost. Otherwise the best alternative would be more profitable. | ||
For example, if a farmer has to decide whether to sow wheat or corn, the opportunity cost of wheat would be the profit generated by sowing corn. In this case, the farmer should sow wheat only if the profit generated by this decision exceeds the opportunity cost. If it does not, then he should sow corn. | For example, if a farmer has to decide whether to sow wheat or corn, the opportunity cost of wheat would be the profit generated by sowing corn. In this case, the farmer should sow wheat only if the profit generated by this decision exceeds the opportunity cost. If it does not, then he should sow corn. | ||
The opportunity cost can be different from the monetary cost. For example, if I buy a new pair of shoes, the monetary cost is what I paid for them. The opportunity cost is the value of the next best thing I could have bought with that money. | The opportunity cost can be different from the monetary cost. For example, if I buy a new pair of shoes, the monetary cost is what I paid for them. The opportunity cost is the value of the next best thing I could have bought with that money. | ||
Revision as of 08:16, 11 September 2008
Opportunity cost is a decision criterion for mutually exclusive alternatives. In economics, it is equal to the value of the best alternative. It means that a decision must be taken if the resulting benefit is higher than its opportunity cost. Otherwise the best alternative would be more profitable.
For example, if a farmer has to decide whether to sow wheat or corn, the opportunity cost of wheat would be the profit generated by sowing corn. In this case, the farmer should sow wheat only if the profit generated by this decision exceeds the opportunity cost. If it does not, then he should sow corn.
The opportunity cost can be different from the monetary cost. For example, if I buy a new pair of shoes, the monetary cost is what I paid for them. The opportunity cost is the value of the next best thing I could have bought with that money.