The cost in terms of foregoing alternatives commonly known as the “Opportunity cost” (OC) can be defined in several ways. It is the cost of a substitute that must be preceded in order to execute a particular action or the gains you could have obtained by choosing an alternative action or the next best alternative that you drop out. See the simplified opportunity cost equation:
OC = explicit costs (accounting costs) + implicit cost
In easier words the opportunity cost of going for education is the money you would have gained if you worked rather. You lose four years of remuneration while getting your education; the value of four years' job experience abandoned for getting education; the value of many activities dropped in order to allocate time to studying; and the value of items that could have bought with the fee or over four years the interest the money could have earned but on the other hand, you seek your future bright by earning more during your career, gratefulness to your educational activity, to counterbalance the lost payoffs.
In economics there is a causal relationship between scarcity and higher prices. The conception of scarcity reflects us that we cannot possess everything we desire because resources are very deficient in quantity. The conception of OC gives the idea of a trade off. The OC is the abandoning of next best alternative utilization for a resource.
Some of the applications of the concept of opportunity cost are:
1. Liberty of choice for the consumer,
2. Career choice,
3. Management of time,
4. Comparative advantage analysis,
5. Possibilities of production, and
6. Capital cost (NetMBA, 2011).
Another simple example is if you go to a shopping mall to buy a shirt, but there you saw really cool pants. And you only have money to buy either a shirt or pants. If you pick the shirt, then the pants is your opportunity cost. For an instance take a gardener’s example: if he decides to grow potatoes, his or her opportunity cost is the alternative vegetable that might have been grown instead (carrots or pumpkins etc.). A selection between two alternatives must be made in both the cases. If you knew the results, it could be an easy decision; however, the risk that you could attain more "benefits" (either monetary or otherwise) with another alternate is the opportunity cost (Investopedia , 2011). The application of the concept of opportunity cost is easier to adopt if the time frame is short. But applying the concept on a larger amount of time, it can be a little complex. You will have to be very careful in planning as consequences can affect your future adversely.
OC applications in any government department:
There can be three break ups:
1. The opportunity cost of the resources used to produce goods supplied through the public sector. If these resources were not used by the government, then they could be used by firms and people in the private sector.
2. The second opportunity cost is the cost of resources used to collect taxes and to enforce government rules.
3. The third opportunity cost of government is the deadweight loss of taxation. People’s incentives tend to change with a change in taxation.
OC applications in any business organization:
It is not necessary that opportunity costs always have a specific monetary value; it is also possible that it has a significant value in other aspects. It is the decision maker who must estimate the opportunity costs subjectively. In business organizational decisions most of such decisions are exclusively financial, the valuation of all costs would be solid, such as in the example of a common fund investment. If a person invests €10,000 in Mutual Fund MNO for one year, then he relinquishes the payoffs that could have been made on that same €10,000 if it was placed in stock DEF. If payoffs were anticipated to be 17 percent on the stock, then the investor has an opportunity cost of €1,700. The mutual fund may only expect payoffs of 10 percent (€1,000), so the difference between the two is €700.
This looks easy to assess, but what is really the opportunity cost of putting the money into stock DEF? The opportunity cost might also cover the mental peace for the capitalist having his pounds invested in a professionally handled fund or the loss of sleep after seeing his stock fall 15 % in the 1st market correction while the mutual fund's losses were very less. It is not so easy to quantify the value of these aspects. It should also be marked that an alternative is only an opportunity cost if it is a naturalistic option at that time. If the option is not feasible, it isn’t an opportunity cost (Reference for Business, 2011).
OC applications in any local council:
Local council, from the funds they collect in form of taxes, takes the step of making bridges in the city rather than making public libraries. The city council actually wanted to eradicate the traffic problem from the city, on the cost of better educational environment.
Suppose if local council announces to construct a medical facility on vacant plot it possess, the opportunity cost is the valuation of the gains relinquished of the second best thing that may have been done with the area and funds for instead. In constructing the medical facility, the local council has relinquished the opportunity to construct a sports complex on that area, or a parking place, or the ability to sell the plot to help reduce the debts of the city, since those utilization lean to be reciprocally exclusive. The genuine opportunity costs of an action like this can never be evaluated with surety, and are often times termed as "hidden costs" as what has been precluded from being brought out cannot be foreseen or anticipated. Even the probability of inactivity is a lost opportunity. In this instance to keep the scenery as it is for nearby areas possibly including areas that it itself possess.