Further, the available options should have an economic value. The foregone option may be a product or a service. These options can be anything- from taking production decisions to investment decisions. Also, they can be making a purchase decision to even valuing time spent on a particular activity.
Explicit costs are the costs that a person or an entity incurs to avail of the benefit of an activity or service or product. It means that the producer has lost an opportunity to spend this amount to buy some other product or service. On the other hand, implicit opportunity costs are the costs that are notional or implied in nature. They are the costs of not choosing an available option. For example, the inherent opportunity cost of setting up a production unit is the loss of opportunity of investing the same amount of money in real estate and selling it after that.
The concept of Opportunity Cost is crucial in the world of business and finance. It explains the rationale of the economic decisions taken or chosen with regards to the other available options. Opportunity Cost provides a vital direction and guidance while deciding what to produce.
It throws light on the following aspects:. Opportunity Cost can simply be calculated by comparing the financial Cost of the next best possible option that has been foregone.
It expresses the pains and sacrifices involved in producing a commodity. However, real costs are not amenable to precise measurement. Modern economists therefore prefer the concept of opportunity cost. Sometimes, there is a discrepancy between the cost incurred by a firm and the cost incurred by the society. For example, an oil refinery discharges its wastes in the river causing water pollution. Likewise, various types of air pollution and noise pollution are caused by various agencies engaged in production activities.
Such pollutions result in tremendous health hazards, which involve cost to the society as a whole. A cost that is not borne by the firm, but is incurred by others in the society is called an external cost. The true cost to the society must include all costs, regardless of the persons on whom its impact falls and its incidence as to who bear them.
Explicit costs are those costs, which are actually paid by the firm. To put it in other words, explicit costs are paid out costs. Explicit costs include wages and salaries, prices of raw materials, amounts paid on fuel, power, advertisement, transportation, taxes and depreciation charges. In other words, implicit costs are costs, which self-owned and self-employed resources could have earned in their best alternative uses. It refers to the highest income, which might have been received by him if he has let his labor, building and money to someone else.
These costs are frequently ignored in calculating the expenses of production. Historical cost refers to the cost of an asset, acquired in the past whereas replacement cost refers to the cost, which has to be incurred for replacing the same asset.
The increment costs are the additions to costs resulting from a change in product lines, introduction of a new product, replacement of obsolete plant and machinery, etc. Sunk costs are those which cannot be altered, increased or decreased by changing the rate of output and the level of business activity.
All the past costs are considered as sunk costs because they are known and given and cannot be revised as a result of changes in market conditions. Please what is the relevant of opportunity in decision making within the scope of limited resources.
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Land refers to all of the natural resources that businesses need to make and distribute goods and services. Jiankang Nyuhalov Teacher.
What is the relationship between opportunity cost and scarcity? Scarcity — The condition that exists when there are not enough resources to satisfy all the wants of individuals or society. Choices — The decisions individuals and society make about the use of scarce resources. Opportunity Costs — The next highest valued alternative that is given up when a choice is made.
Donatas Jauregiandia Teacher. How does scarcity create opportunity costs? Since consumers' resources such as time, attention, and money are limited, they must choose how to best allocate them by making tradeoffs. The concept of trade-offs due to scarcity is formalized by the concept of opportunity cost. The opportunity cost of a choice is the value of the best alternative forgone. Dahman Beauvais Teacher.
What is trade off and opportunity cost? In economics, the term trade - off is often expressed as an opportunity cost , which is the most preferred possible alternative. A trade - off involves a sacrifice that must be made to get a certain product or experience. A person gives up the opportunity to buy 'good B,' because they want to buy 'good A' instead. Marilina Zohner Teacher. What is the purpose of cost benefit analysis? Cost — benefit analysis CBA , sometimes called benefit costs analysis BCA , is a systematic approach to estimating the strengths and weaknesses of alternatives used to determine options which provide the best approach to achieving benefits while preserving savings for example, in transactions, activities, and.
Nuta Zuidwishk Reviewer. How Opportunity cost affects decision making? Every time you make a choice, you're weighing the opportunity cost of that action.
Lehbib Leyton Reviewer. What does cost mean in economics? Economic cost is the combination of losses of any goods that have a value attached to them by any one individual. Economic cost is used mainly by economists as means to compare the prudence of one course of action with that of another. Rebeka Onixt Reviewer. What are the three economic systems? Economists generally recognize three distinct types of economic system.
These are 1 command economies ; 2 market economies and 3 traditional economies. Each of these kinds of economies answers the three basic economic questions What to produce, how to produce it, for whom to produce it in different ways. Fama Schram Reviewer.
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