Business choices(1.5.5) Flashcards
What is an opportunity cost?
the next best alternative forgone when making a decision
Opportunity cost example
when a consumer chooses to purchase a new phone they may be unable to purchase new headphones
the headphones represent the loss of the alternative
What is a trade off?
a situation where having more of one things leads to having less of something else
Trade off example
a business has a limited amount of money to spend on promoting their products
choosing to sponsor an elite athlete means they may have to give up other forms of promotion such as radio adverts
Why opportunity cost is important
for most businesses resources are limited (particularly new businesses)
when resources are limited decisions have to be made about what to spend/invest and where to focus
entrepreneurs and business management take calculated risks and weigh up the potential implications of decisions (opportunity costs) before choosing the options they believe are best for the business