ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -When making financial decisions, it’s important to consider opportunity cost-the amount of money that you have to spend in order to get something else. Opportunity cost is a basic economic principle that applies to businesses as well. Essentially, it’s what you give up when pursuing an alternative course of action.

Detailed explanation-2: -The opportunity cost is the value of what you forgo to pursue something. The term describes the phenomena of choosing not to do something when you make a choice, as you give up one thing in favor of another. An example of opportunity cost might be when you choose between two brands of bread at the grocery store.

Detailed explanation-3: -In business, opportunity costs play a major role in decision-making. If you decide to purchase a new piece of equipment, your opportunity cost is the money spent elsewhere. Companies must take both explicit and implicit costs into account when making rational business decisions.

Detailed explanation-4: -Scarcity of resources – be that time or money – means that we have to make decisions about how we use what we have. Because we have to choose, we can only have the benefits of one option, and have to forego the benefits of the other. The benefits of the foregone option are the Opportunity Cost.

Detailed explanation-5: -Opportunity cost is hugely important in decision making. Without it, we could not rationally make a business decision that makes economic sense to our businesses. This Opportunity Cost could simply be weighing up the advantages and disadvantages of choosing one pricing structure over another.