Give an example of an opportunity cost that business faces?
Question: Give an example of an opportunity cost that business faces?
Opportunity cost is the value of the next best alternative that is forgone as a result of making a decision. It is a concept that is relevant for both individuals and businesses. In this blog post, we will focus on how opportunity cost affects business decisions and give some examples.
One example of an opportunity cost that a business faces is when it decides to invest in a new project or product. By doing so, the business gives up the opportunity to invest in other projects or products that could have generated higher returns or benefits. For instance, suppose a company has $100,000 to invest and it can choose between two projects: Project A, which has an expected return of 15%, and Project B, which has an expected return of 20%. If the company chooses Project A, the opportunity cost is the difference between the returns of Project B and Project A, which is 5% or $5,000. This means that by choosing Project A, the company loses $5,000 in potential profits that it could have earned by choosing Project B.
Another example of an opportunity cost that a business faces is when it decides to produce more of one good or service at the expense of another. By doing so, the business gives up the opportunity to produce and sell more of the other good or service that could have generated higher revenue or satisfaction. For instance, suppose a bakery can produce either 100 loaves of bread or 50 cakes per day. If the bakery chooses to produce 100 loaves of bread, the opportunity cost is the number of cakes that it could have produced instead, which is 50. This means that by producing 100 loaves of bread, the bakery loses the revenue and customer satisfaction that it could have gained by producing 50 cakes.
Opportunity cost is an important concept for businesses to understand and consider when making decisions. It helps them to evaluate the trade-offs and alternatives that they face and to choose the option that maximizes their value or utility. By being aware of the opportunity cost, businesses can avoid making decisions that result in unnecessary or excessive losses.
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