Opportunity Cost Flashcards
Choices
We do not have unlimited money, so we
must make choices about what we buy.
When making a choice between two
things, there will always be an option that
we decide is the best and that is the one
we choose.
For example, if you are looking at two
pairs of trainers in the shop, you will pick
the pair that look and feel the best!
Choices 2
Businesses and governments also
have to make choices.
A business may have to decide
which is more important, a new
piece of machinery or a new van.
The government may have to
choose between a new school and a
new hospital.
Opportunity Cost
When you make a choice, there will
always be an option you pick and an
option that you reject.
So the government may pick a new
school and reject the new hospital.
In business, we call the rejected option
the Opportunity Cost of that decision.
So if the government picks a new school,
then the opportunity cost of that decision
is the new hospital.
Opportunity cost 2
You may have enough money to buy either a
new top or go to the cinema.
If you decide to spend your money on a new
top, you cannot go to the cinema.
We would say that the opportunity cost of
your decision to buy a new top, was the trip
to the cinema.
In other words, you give up the opportunity to
go to the cinema by buying the new top
Opportunity cost 3
So the opportunity cost of any decision
is the thing that you decide not to do.
You no longer have the opportunity to
do it, since it is the rejected option.
Every business decision will have an
opportunity cost and business people
need to be aware of what it is.
Business Decisions
Consumers, businesses and
governments make decisions based on
what they think is best for them in their
situation.
Business people are constantly making
decisions about a large number of
issues.
Business Decisions
This is central to the study of business.
Good business people will understand that
they have lots of options. They will know what
their alternatives are and will make their
decisions based upon their understanding of
the world of business.
Having a good theoretical understanding will
help when making such decisions – and that is
why you are studying business!
