Opportunity Cost

Opportunity cost is a concept that is discussed and is useful in the analysis of different problems that pertains to different subjects or fields. Literally, u may remember it like the cost of the opportunity forgone or which is given up. Let me put this in another way.  

Opportunity Cost and Economics

Every day, we find ourselves in the hot seat debating about what is economical and what is not. Economics answer the very core question of what to produce and questions pertaining to it like quantity of the Produce, and obviously for whom to produce. The subjects of the question are consumer and the producer. Opportunity cost helps them by answering these basic questions and henceforth opportunity cost is a precise answer to the Economic Problem.   

Opportunity Cost and Cost Accounting

Financial accountant do not make much use of the concept of the opportunity cost. However, cost accounting has relevance. Management often find themselves to decide between the two alternatives that are related to any certain activity. For instance, Management requires Dies (x 1000) for the production of the goods that are in demand in the market. Now Management has a dilemma, either to buy these dies from an outside vendor or alternatively make these dies in-house. After the due consideration, management found it cost effective to make these dies in-house. The cost that would be incurred to make an outright purchase is the opportunity cost of making these dies.

Opportunity Cost and Financial Management

Making of these assessments of relative pricing and corresponding merits demerits is what Financial Management central gist is. When you would enroll yourself for a certain course pertaining to Financial Management, you would find that whole of the financial management is nothing but application of the Opportunity cost to the Markets, securities and Financial Instruments.

Opportunity Cost and Cost and Benefit Analysis

Opportunity cost breeds the very concept of cost-benefit analysis. Opportunity cost is the only concept that lets you have Relative pricing assessment and corresponding comparison of the relative merits and demerits and hence offers value for money. In this way, it make you compare the relative costs and their relative benefits and leads you to the best economic decision in the short-term that might prove worth in the long-term period as well.

Advantages and Disadvantages of Opportunity Costs

Advantages It is imperative to explore the advantages pertaining to a specific concept that increases your comprehension of the concept manifold. U know about the lost opportunity An economic decision is an informed decision. Opportunity cost lets you being informed of the other alternatives that you have left behind in consideration of the best decision made and hence gives you sense of security that you have made a wise decision that leads to value for money. Relative Pricing Opportunity cost is the only concept that lets you have Relative pricing assessment and corresponding comparison of the relative merits and demerits and hence offers value for money.

Disadvantages

Everything in this world has certain disadvantages pertaining to it and the concept of Opportunity cost is not absolved at all. Following paragraphs would pour a little light on the disadvantages. Time Consuming Inevitably, it is time consuming. You have to assess what was the best alternative that has forgone out of your hands after the making of certain decision. It is then followed by the making of the estimate as to its monetary value. Difficult Computation Opportunity cost is not necessarily described using the quantitative terms. It may be interpreted in the qualitative terms, thus making the computation phase difficult.