Opportunity Cost

What is opportunity cost? Opportunity costs usually revolve around decision-making. In terms of consumers, it is the cost of choosing one choice over another. One you choose to buy one product over another, you loose the opportunity to use the product that you did not buy.






Most of the times, buyers and suppliers are limited by money and can only afford a few choices out of a wide range, therefore every time a choice is made there is an opportunity cost. Taking the simple example from the short comic above, the boy has $5 and he has three choices. He can either save his money to buy something of good quality that he really wants (though it may be more expensive), or he could buy a movie on tape that is not his first choice, or he could buy a used videotape that may be of bad quality (but it's cheap!). If he saved his money, the opportunity cost would be that he would not be able to watch any movies or TV shows on that day. If he had chose the second option, the opportunity cost will be that he would have to wait for a longer time save up to buy the movie he likes and miss the chance to buy the SpongeRob video on his birthday.

Similarly in supply and demand, decisions have to made all the time. Buyers have to choose which product they want to buy and negotiate with suppliers for a good and reasonable price. However, when they choose one, the alternative will be forgone. When making decisions, businesses have to choose the choice that is the least costly and that it will benefit them in the future.

Here is a short role play video explaining opportunity cost. Though this example is not present in real-life businesses, it is easy to relate to. It's about a guy who has a big test the next day and needs to study for it. But he has a date with his girlfriend on the same night and she will be mad if he chooses his studies over her. Which will he choose? A good time or a good grade?