There is a term in economics called opportunity cost. Approximately what kind of costs, yes. In the Journal of Consumer Research, Spiller defines opportunity cost assessments as alternative options to focus on needs.
In simple terms, opportunity costs are costs incurred due to certain choices due to no other option being chosen. These costs may arise due to the limited economic resources of individuals or companies. Money, time, energy etc.
This is why people have to make choices in life and make sacrifices for other choices. See the article below for more details.
What Is Opportunity Cost
According to the Financial Services Authority (OJK), opportunity cost is income from alternative options for mutual funds other than those considered. For example, when Buddy Finansialku chooses to invest in bonds instead of deposits because it is more profitable.
Summary:
- In simple terms, opportunity costs arise due to certain choices because no other option is chosen.
- Opportunity cost is not always about money. Opportunity costs have various terms and characteristics.
- In a business or corporate context, opportunity costs can help business owners or stakeholders make the right decisions.
Characteristics of Opportunity Cost
Opportunity costs are not always about money. There are several conditions and features such as:
- Long-term profit, happiness, leisure, etc.
- It offers many possibilities or alternative options as a result of the emergence of opportunity costs.
- The choice of opportunity cost depends on the needs of each individual or company.
- It is usually in the form of secondary and tertiary needs of individuals or companies.
- In an individual context, opportunity cost is a kind of sacrifice for the option to get something else.
Opportunity Cost Types
There are several things to consider as a form of opportunity cost. Such as the availability of money, time and energy.
However, the most common types of fees include:
1. Implicit Opportunity Cost
It is an intangible cost that we cannot calculate in numbers. For example, if you want to buy food for delivery, the implicit costs are waiting time, profit, satisfaction level, and pleasure.
2. Explicit Opportunity Cost
It is a cost that we can easily calculate. For example, amount of goods, money, amount of assets, profit, etc.
- Opportunity Cost Function
- Opportunity costs in a business cannot be presented in financial statements.
But it is useful when making decisions that require choosing from many options. Here are some of its functions, including:
- Assisting individuals or companies to calculate the cost of working capital.
- It facilitates the determination of the scale of priority in a business.
- Help save on business finances by choosing more substantial opportunities, less capital and bigger profits.
- Get the best and most suitable alternative options for individuals or companies.
Opportunity Cost Benefits
In the context of a business or company, these costs can help business owners or stakeholders make sound and profitable decisions.
Here are some of the advantages in a business, among others:
- Provide opportunities to minimize risk with more promising returns.
- Make it easy for business owners to calculate estimated working capital.
- Help set business priorities in decision making.
- Save on operating expenses that are less or insignificant according to the selected priority.
Factors Affecting Opportunity Cost
Making the right decision isn't easy, of course, because we have other opportunities to sacrifice. Various factors affect it, including:
- Money or capital owned in a business or company.
- available resources.
- Profit or expected profit.
- The current resale value of the product or service.
- Advantages, disadvantages, risks and solutions of the choices made.
How to Calculate Opportunity Cost and Example
If you are facing scarcity or limited resources, you must take the right steps. There are two ways you can calculate opportunity cost:
- If there are two options, the opportunity cost is the difference between the value of the opportunity you chose and the value of the opportunity you did not choose (sacrifice).
- If there are more than two options, the opportunity cost is the opportunity value you sacrifice and has the greatest value.
Basically, these costs should always yield a profit. To understand the concept of opportunity cost, Finansialku will make an example of opportunity cost below as an example.
1. Example One
Pak Bandi has a store unit in a strategic area as a business location. According to the plan, Mr. Bandi will use the store as a warehouse for stock of retail business products.
But his friend Mr Murti wants to rent the shop for Rp 60,000,000 a year. When Pak Bandi decides to rent the shop, he will miss the opportunity to profit from his business development.
Also, Mr. Bandi needed to find another place he could use as a warehouse. Limited resources in the form of buildings or shops that require him to choose one opportunity and lose another opportunity are called opportunity costs.
2. Example Two
Mr. William has Rp 450,000,000 in cash. With this money, he has the opportunity to buy his dream car for 400,000,000 IDR.
Or earn the money as additional working capital of 350,000,000 IDR. Eventually, Mr. William decided to use the money as additional capital for his business.
Thus, Mr. William lost the opportunity to buy a car, hence the resulting opportunity cost was IDR 350 million. The above example can be proof that the budget allocated to buy something can be directed towards other needs.
Therefore, it is very important for us to have an understanding of how to manage money wisely. If you are still confused about how to do it, you can start by checking out the free ebook Finansialku The Importance of Managing Personal and Business Finances.
3. Example Tree
Farah has Rp 30,000,000 that she plans to invest. In this case, there are two investment products, both of which are of great benefit. The first investment product will yield 5% and the second product will yield 7%.
If Farah uses her money to invest in the second product, the 2% difference between the two alternatives is the opportunity cost sacrificed.
4. Example Four
After completing his undergraduate education, Ajeng preferred to deepen his English for 3 months for Rp 7,000,000 instead of working at a notary public with a monthly salary of Rp 5,000,000.
If we count, the salary of working at the notary public for 3 months is Rp 21,000,000. As Ajeng chose to deepen her English, she earned Rp 21,000,000 for 3 months by working at a notary public.
Solution
Make the Best Decision! This was a complete explanation of opportunity costs with examples. Do you already understand what opportunity cost is and how to calculate it?
If you're in a stressful situation that requires you to make a choice, do your best. To make the best decision. If you need advice when making financial decisions, don't hesitate to discuss it with my Financial Planner.
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