opportunity cost

(redirected from Economic cost)
Also found in: Dictionary, Thesaurus, Medical, Encyclopedia, Wikipedia.
Related to Economic cost: opportunity cost, Total cost, Economic Profit, Accounting cost

Opportunity Cost of Capital

The difference in return between an investment one makes and another that one chose not to make. This may occur in securities trading or in other decisions. For example, if a person has $10,000 to invest and must choose between Stock A and Stock B, the opportunity cost is the difference in their returns. If that person invested $10,000 in Stock A and received a 5% return while Stock B makes a 7% return, the opportunity cost is 2%. One way of conceptualizing opportunity cost is as the amount of money one could have made by making a different investment decision. Importantly, opportunity cost is not a type of risk because there is not a chance of actual loss.

opportunity cost

The best alternative that is forgone because a particular course of action is pursued. An example is the interest income that is given up when large balances are kept in a checking account. Likewise, purchasing a home means that less money is available for another investment.

Opportunity cost.

When you make an investment decision, there is often a next best alternative that you decided not to take, such as buying one stock and passing up the opportunity to buy a different one.

The difference between the value of the decision you did make and the value of the alternative is the opportunity cost.

If you decide to invest in a risky stock hoping to realize a high return, you give up the return you might have earned on a bond or blue chip stock. So if the risky stock fails to perform, and you only make 3% on it when you might have made 6% on a blue chip, then the opportunity cost of the risky investment is 3%.

Of course, if your stock pick pays off, there will have been no opportunity cost, because you will make more than the 6% available from the safer investment.

Businesses must also consider opportunity costs in their decision-making. If a company is considering a capital investment, it must also consider the return it would earn if, instead of going ahead with the capital project, it invested the same amount of money in some other way.

In general, a business will only make a capital investment if the opportunity cost is lower than the projected earnings from the new project.

opportunity cost

a comparator against which to measure the return on the use of resources in some particular activity, as compared to the return which the same resources could earn in some other alternative activity. For example, a firm may employ its limited factory capacity in the production of dining tables or alternatively coffee tables, and would measure the opportunity cost of manufacturing dining tables in terms of the profits it might have earned from making coffee tables. For an illustration of the broader financial implications of this concept see the entry ECONOMIC VALUE ADDED. See LINEAR PROGRAMMING.
Opportunity costclick for a larger image
Fig. 136 Opportunity cost.

opportunity cost

or

economic cost

a measure of the economic cost of using scarce resources (FACTOR INPUTS) to produce one particular good or service in terms of the alternatives thereby foregone. To take an example, if more resources are used to produce food, fewer resources are then available to provide drinks. Thus, in Fig. 136, the PRODUCTION POSSIBILITY BOUNDARY (PP) shows the quantity of food and drink that can be produced with society's scarce resources. If society decides to increase production of food from OF1 to OF2, then it will have fewer resources to produce drinks, so drink production will decline from OD1, to OD2. The slope of the production-possibility boundary shows the MARGINAL RATE OF TRANSFORMATION (the ratio between the MARGINAL COST of producing one good and the marginal cost of producing the other). In practice, not all resources can be readily switched from one end use to another (see SUNK COSTS).

In the same way, if a customer with limited income chooses to buy more of one good or service, he can only do so by forgoing the consumption of other goods or services. His preferences between food and drink are reflected in his INDIFFERENCE CURVE II in Fig. 136. The slope of the indifference curve shows the consumer's MARGINAL RATE OF SUBSTITUTION (how much of one good he is prepared to give up in order to release income that can be used to acquire an extra unit of the other good).

If the indifference curve II is typical of all consumers’ preferences between food and drink, then society would settle for OF1 of food and OD1 of drinks, for only at point A would the opportunity cost of deploying resources (the slope of PP) correspond with the opportunity cost of spending limited income (the slope of II). See also PARETO OPTIMALITY, ECONOMIC RENT.

opportunity cost

The value of the opportunity given up in order to take advantage of the one you decide to take.The classic opportunity cost evaluation is the “rent or buy decision.”If a person buys a home,the person gives up the opportunity to invest the down payment money in something else. Because mortgage payments and maintenance costs are usually higher than rent, the new homeowner must also spend more money each month rather than investing it. On the other hand, the analysis must take into account tax savings because of the deductibility of home mortgage interest payments.Conducting an analysis of opportunity costs in the “rent versus buy”situation might cause one to buy immediately,buy later,or decide not to buy at all for the foreseeable future.Ginnie Mae has an excellent rent versus buy calculator at www.ginniemae.gov.

References in periodicals archive ?
The economic cost of an action X, C(X), is the explicit cost of X plus the implicit cost of X: C(X) = [C.
It is far from certain that the epidemic will be contained by the end of the year, so the report estimated the economic costs of two scenarios as the battle against the disease continues.
2009 at Open Market Sale Scheme (OMSS) prices, economic cost or MSP/MSP derived prices at present.
Overall, alcohol-involved crashes are responsible for 22 percent of the economic costs associated with motor vehicle crashes
Death and disability from lung, colon, rectal and breast cancer accounted for the largest economic costs on a global scale, according to the study, and the greatest burden in high-income countries.
Applying this average economic cost of $81,000 to Montana's 1,623 victims of alcohol crashes with injuries (2004/2005/2006 three-year average) yields an annual cost of $131 million.
WHEN SURVEYS indicate that drug use is steady or falling, bureaucrats and politicians trying to shore up support for the war on drugs can turn to another set of numbers: According to analyses commissioned by the federal government, "the economic costs of drug abuse" rose from $102 billion in 1992 to $143 billion in 1998.
The NHTSA study, The Economic Impact of Motor Vehicle Crashes 2000, also estimates the annual economic cost of roadway crashes:
It also believes that the emphasis on economic cost of service information will assist all of us involved in the management or oversight of state and local governments in making more efficient and effective use of the resources the taxpayers have given us.
Although it is difficult to quantify, the economic cost of caregiving for families ranges from $4,800 to $10,400 per caregiver, according to one study cited by the White House.
The solutions to this class of problem result in the identification of a range of potential solutions where the gain of one objective, for example, lower economic cost is achieved only through the tradeoff against other objectives -- i.
The economic cost of the regional banking crisis could vary from 15 to 35% of an afflicted country's gross domestic product (GDP), Fitch IBCA said.

Full browser ?