Opportunity costs

Also known as: Alternative costs, waiver costs, lost profit, shadow price

The term opportunity costs is used both in business administration and in economics. Opportunity costs colloquially refer to the cost of lost profits.

Definition / explanation

From a business point of view, opportunity costs are used in the context of cost accounting and denote the lost contribution margins that arise from an unrealized option. The opportunity costs thus serve as a benchmark in order to assess realizable contribution margins.

From an economic point of view, opportunity costs denote the lost benefit that arose due to an unrealized option for action. The opportunity cost is in the Microeconomics also referred to as alternative costs.

Types of opportunity cost

Input-related opportunity costs - Input-related opportunity costs put the contribution margin of the produced good on the input factor (for example working hours or number of pieces). This results in the relative contribution margin.

The input-related opportunity costs are not limited to the contribution margin and can also be ascertained, for example, through lost customer acquisition, market shares or sales. However, since the unit contribution margin is easier to compare, this has become the norm in practice.

Output-related opportunity costs - Output-related opportunity costs refer to the lost profit margins that result from an output-related alternative. The output-related opportunity costs are divided into alternative costs and optimal costs.

Alternative costs represent the deviation of the opportunity costs that result from the next best alternative. Optimal costs, on the other hand, describe the deviation of the selected alternative from the optimal use.

Examples

Investing in land or buildings creates tied-up capital that cannot be used for other purposes. The opportunity costs arise here, for example, by foregoing interest income that can be expected without the investment.

Opportunity costs can also refer to the lost benefit of a product that results from doing without. If, for example, product B is dispensed with in favor of product A, one can speak of opportunity costs.

In economics, opportunity costs can be determined using the Transformation curve erläutern. Die Transformation curve stellt ein nützliches Verhältnis von Gütermengen grafisch dar, die bei vorhandenem Ressourceneinsatz erzielt werden können. Eine Steigung der Transformationskurve wird als Grenzrate bezeichnet und stellt die Opportunitätskosten dar.

Another example from economics can be explained using the comparative cost advantage. If an economy offers a good more cheaply than a competing economy, the lower costs are referred to as opportunity costs. These arise from the cost savings that result from asserting yourself against the competition.

Areas of application of opportunity costs

Opportunity costs can be applied in economic and business areas:

In economics

In business administration

  • supports decision-making about additional orders
  • helps optimize production program

Summary

  • Opportunity costs are used in business and economics
  • Opportunity cost can be referred to as the cost of lost profit
  • Opportunity costs are also known as alternative costs
  • In business administration, opportunity costs relate to cost accounting (lost profit margins)
  • In economics, opportunity costs denote the lost benefit
  • Opportunity costs can be divided into input-related and output-related opportunity costs
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