In conditions of limited economic resources, each subject economic relations is faced with the question of the optimal use of available resources in order to obtain the maximum. But in the selection process, so-called opportunity cost, which will be discussed below.

What is opportunity cost?

Since in most cases we are dealing with limited resources, the question of their alternative use always arises. Of all possible alternatives, there is always the best alternative that provides the maximum benefit. If, as a result of the choice of alternatives, preference was not given to the best alternative, then “opportunity costs” or “lost profits” arise.

opportunity cost(the term “cost of lost profits” or “opportunity costs” from the English opportunity cost is also used) is an economic term denoting lost profits (in a particular case, profit, income) as a result of choosing one of the alternative options for using resources and, thereby , rejecting other possibilities. The amount of lost profit is determined by the utility of the most valuable of the discarded alternatives.

opportunity cost represent the loss of potential benefit from other alternatives when some other alternative is chosen. That is, opportunity cost is the benefit, profit, or value of something that must be given up in order to gain or achieve something else. Since every resource (land, money, means of production, labor resources, time, etc.) can be applied to alternative uses, every action, choice or decision has an opportunity cost.

The concept of opportunity cost plays a crucial role in trying to ensure the efficient use of limited resources. Opportunity costs are not limited to monetary or financial costs: the real cost of lost (underproduced) products, lost time, pleasure, or any other benefits that provide some utility should also be considered as opportunity costs. The opportunity cost of a product or service refers to the income that can be earned through alternative uses of it. The meaning of the concept of opportunity cost can be explained with the help of the following examples:

• opportunity cost Money invested in own business, is the rate of return (or risk-adjusted return) that can be obtained by investing these funds in other enterprises;
• the opportunity cost of the time a person spends at his job is the salary (or other income) that he could receive working in other companies or in other positions (adjusted for the relative moral satisfaction from the two professions).
• The opportunity cost of using equipment to produce one product is the income that could be earned from the production of other products.

Opportunity costs are fundamental costs in the economy and are used in calculating the costs and results of project analysis. Such costs, however, are not reflected in, but are taken into account when making management decisions by calculating cash costs and their resulting profit or loss.

Opportunity costs are a broader concept than estimated costs, and therefore it is used in making investment decisions, in calculating the associated costs and potential profits from them. For example, if it is necessary to choose from several competing and mutually exclusive choices, the choice will be based on an assessment of opportunity costs equal to the income that could be obtained as a result of the second best option.

History of opportunity cost

The term "opportunity cost" was originally used in 1894 by David L. Green in his article "Pain Cost and Opportunity-Cost" in the Quarterly of Economics. However, the idea of ​​opportunity cost is also found in the work of earlier authors, including Benjamin Franklin and Frederic Bastiat. The famous phrase "Time is money" published in Advice to a Young Merchant (1748) is based on the idea of ​​opportunity cost.

Later, the term "opportunity cost" was also used by the Austrian economist Friedrich von Wieser in The Theory of the Social Economy (1914). Specifically, his opportunity cost theory suggests the following:

• productive goods represent the future. Their value depends on the value of the final product;
• the limited resources determine the competitiveness and alternative ways of their use;
• are subjective and depend on alternative possibilities that have to be sacrificed in the production of a certain good;
• the real value (utility) of any thing is the lost utility of other things that could be produced using the resources spent on the production of this thing. This provision is also known as Wieser's Law;
• imputation is carried out on the basis of opportunity costs - the costs of lost opportunities.

The contribution of von Wieser's opportunity cost theory to economics is that it is the first description of the principles of efficient production.

Opportunity Costs: Explicit and Implicit

Explicit costs

Explicit costs is an opportunity cost that includes direct cash payments. The explicit opportunity cost of factors of production that do not yet belong to the producer is the price (cost) that the producer must pay for them. For example, if a business purchases equipment for $100,000, then its explicit opportunity cost is $100,000. This cash outlay represents a missed opportunity to buy something else for $100,000. (for example, raw materials and materials).

Implicit costs

Implicit costs(also called implied, opportunity, or contingent costs) are opportunity costs that are not recorded as cash outflows, but are evidenced by a firm's choice not to allocate its existing (own) resources or factors of production to more profitable uses. For example: if the company placed the available free cash on deposit in a bank, it would be able to receive income in the form of accrued interest. If the company rented out the existing warehouse space, it would be able to receive rental payments. The size of such payments is the implicit opportunity cost.

How to calculate opportunity cost?

Opportunity costs can be calculated as the difference between the most optimal (profitable) option and the selected (implemented), so they are often called "opportunity costs". Opportunity cost is precisely the result of comparing a given choice with the best available option. Thus, the opportunity cost can be calculated by the formula:

Of course, this formula is very simplified, because in some cases, it will be necessary to carry out an additional "correction for the wind", to take into account various economic factors and parameters. However, from the above formula it follows that:

• A choice is optimal if its opportunity cost is minimal. A rational economic agent minimizes opportunity costs.
• The opportunity cost cannot be less than zero. The opportunity cost is zero if the most optimal option is used, i.e. option is compared with itself.

Example of opportunity cost calculation

Example 1 The investor evaluates investment options. the first investment project is 9.5%, and the second - 7.3%. In this case, for the second investment project, the opportunity costs will be:

Thus, if the investor chooses the second project, then his lost profit (lost profit) will be 2.2%.

Example 2 At individual there was a need to get. Bank A offers a symbolic loan of 0.1%. Bank B offers loans at 14% per annum. At the same time, Bank B charges an additional fee for issuing a loan, while Bank A charges a number of additional fees. What to do in this situation?

To begin with, the cost of the loan must be reduced to a "common denominator", i.e. calculate . Suppose that the effective interest rate on a loan from Bank A is 24% per annum, while for a loan from Bank B it is 15% per annum. In this case:

That is, by taking a loan from Bank A, the client will incur opportunity costs (overpay on the loan) in the amount of 9% per annum, despite the fact that Bank A declared a nominal interest rate of 0.1% per annum!

How to find the opportunity cost of each decision?

How to find opportunity costs and calculate lost profits?

Opportunity costs basically include those benefits that you can no longer receive due to the fact that you made one of several possible decisions. Lost profits sounds ominous. Like you can really make a mistake if you make the wrong choice. On a daily basis, we make small decisions that also include various opportunity costs. Therefore, in order for you to make the most profitable decisions, it is important to understand how lost profits work and how to find opportunity costs. Let's find out!

What is opportunity cost?

Opportunity cost is what you give up when you choose one of the options. No matter what decision you make, there is always the best option, which you can refuse and, accordingly, miss a better opportunity.

You can never completely eliminate opportunity costs because every decision you make has a potentially profitable alternative. It's important not to think about "what if" and "should have". Be pragmatic and responsible every time you make a decision.

“One of the most important concepts in economics is ‘opportunity cost’—the idea that once you spend money on one thing, you can no longer spend it on something else.” (Malcolm Turnbull)

Alternatives account for what you cannot do as a result of each possible decision.

Alternative possibilities = return of the most profitable option- return the selected option

deficit

All our resources: time, money, efforts are finite and can be used in various ways. You can use the time you planned to get a new specialization, for example, to improve your skills in your current profession.

In this situation, you will need to decide what is the most valuable opportunity to allocate your time and what will have the highest return on your chosen investment option. You need to think carefully about your decision to be sure that the benefits gained from choosing one option will be more valuable than choosing another.

Simple Examples of Opportunity Costs

Even a simple decision about where you want to eat leads to inevitable missed opportunities. You want to go out for dinner. You decide to go to a French restaurant instead of an Italian one. The pleasure of Italian food is the alternative price of this decision.

While you may be satisfied with a meal in a French restaurant, even more so than in an Italian one, you still miss out on good food and good experiences.

The opportunity cost can also apply to your daily purchases. Do you want to connect cable TV and buy new book. But you don't have the money for both options. You choose a book. The pleasure of watching cable TV is an alternative.

Examples in investing

Of course, there are situations when the lost value of the decision is much higher than the choice between a steak or a burger. The choice of investment vehicle is one area where opportunity costs need to be considered more carefully.

Every time you invest your money, you should expect certain lost benefits. Even the most experienced traders and financial investment professionals have been disappointed by stocks that have gone down sharply despite initially favorable forecasts. In other cases, stocks can skyrocket even if no one is predicting their success.

Factoring the opportunity cost of all investment options will allow you to make informed decisions about where to invest your money.

Are you investing your extra $5,000 in Facebook after a little flounder, or will you invest it in Kodak?

The real value depends not only on the difference in returns that you will receive from a particular set of shares, but also on the time you spend waiting for your investment to pay off. For example, you have $10,000 worth of shares that you can sell now for $15,000, but if you delay the sale for three months, the value of the shares is expected to rise. But you decide to sell now.

The alternative opportunity would be the difference between the $15,000 you received in the early sale and the price you would have sold the stock for three months later. When investing, time is money!

Perhaps you would have made even more money, perhaps you would have lost money.

The opportunity cost is not always obvious.

Investment decisions don't always depend on how much money you could make or lose. In the example above, it is possible that it is financially more profitable to make a $5,000 profit decision than to expect an increase in profit in three months.

Perhaps you could use the $5,000 to pay off a loan or debt early to avoid paying high interest. Perhaps you could use that $5,000 to invest in another promising stock that is expected to rise in value quickly.

Hidden and Explicit Costs

When considering opportunity costs, we must consider two types of costs: implicit and explicit.

Consider studying at a university. The obvious costs of such a decision are the costs of such things as tuition fees, room and board, books, and so on.

The time required to attend classes also requires financial costs. This is a hidden cost. From the point of view of having to pay, such costs cost us nothing, so they are not so easy to calculate. Other hidden costs are money lost due to overwork during training.

Many people forget about the hidden costs associated with their decisions and instead focus on the explicit opportunity costs. Unfortunately, this kind of thinking leaves out some important implications of financial decisions.

For example, the opportunity to take a refresher course. It may cost you several hundred dollars, but it may also give you the opportunity to improve your career.

In this case, you can earn tens or even hundreds of thousands of dollars more than if you went the other way. In this example, the explicit cost is relatively minor and the implicit cost is significant.

Nothing to do

Doing nothing is also a possibility. Sometimes we are so overloaded with information that we cannot make a decision, so we just stand still. This will lead to dire consequences. We all know how valuable time is when it comes to investing. Inaction has an alternative possibility. Late investment leads to losses.

Unfortunately, people who face complex and multifaceted investment decisions often choose to do nothing. By taking no action, they can completely avoid the risks, even though they lose the benefits of the investment.

Careful consideration of options for opportunities and risks is essential. However, do not get carried away with research to the point of constantly postponing decisions.

In the investment world, time is of the essence and hesitation can cause you to miss out on good opportunities.

Three questions

The number of alternative possibilities is almost limitless. But you don't need to go into that much detail. It is enough to understand how to find opportunity costs in three areas:

1. Money

What else could you do with this money? Perhaps you could use your funds for training or education rather than investments to maximize your long-term financial gains.

2. Time

What else could you do with this time? In some cases, your time is more valuable than your financial capital. Make sure you understand how you will be spending your time when making a personal or professional decision.

3. Effort

Where else could you spend your efforts? If a certain stock can make you a significant profit, but it takes a huge amount of effort to monitor trends and patterns, it may not be worth it in the long run. You may decide that your energy is better spent on your current professional endeavors.

By answering these three questions, you will answer the question of how to find opportunity costs to accept The best decision. Start putting your knowledge of risk minimization into practice

The meaning of the concept of opportunity costs or the cost of lost opportunities is that the adoption of any decision of a financial nature in most cases is associated with the rejection of any alternative option. In this case, the decision is made as a result of comparing not direct, but alternative costs.

Imputed (opportunity) costs- losses resulting from the fact that alternative possibilities were not used, which are closest in terms of their effectiveness to the option under consideration. The opportunity cost, also called the price of chance or the price of missed opportunities, is the amount of cash outflow that will occur as a result of a decision, including the income that a company could have received if it had preferred a different option for using its available resources. Lost profit is a loss and should be taken into account when evaluating financial transactions.

In economic theory, opportunity (opportunity) costs are understood as the cost of other products that should be abandoned or sacrificed in order to get some amount of this product.

For example, if production areas are allocated for an investment project, which can be sold as an alternative course of action, then the profit (net of taxes) that an enterprise could receive in the event of a sale, when evaluating the effectiveness of the investment project, must be included as imputed, opportunity costs in investment costs.

To formalize decisions taking into account opportunity costs, you can use the flowchart proposed by the English scientist B. Ryan (Fig. 2.1).

Opportunity costs can be external and internal. The sum of the internal and external opportunity costs of any operation is the gross opportunity cost. If making a financial decision requires purchasing materials or hiring new employees, i.e. direct cash costs, talk about external opportunity cost. If you plan to use internal resource, already available at the enterprise, and paid earlier, regardless of the decision made, then they talk about internal opportunity cost. For example, when deciding on the advisability of investing free cash in any assets, the lost profit is taken into account as internal opportunity costs, as lost income from their alternative use, for example, when crediting funds to a deposit.

Rice. 2.1 Flowchart for calculating opportunity costs, English scientist B. Ryan.

Can be distinguished following rules practical application this concept:

1. When making financial decisions, the manager must take into account all possible alternative options for using assets and choose the one in which the excess of possible income over opportunity costs is maximum.

2. In the absence of other alternatives, any solutions that allow at least a minimal increase in capital must be implemented.

3. When making decisions taking into account opportunity costs, cash inflows and outflows that have taken place in the past are not taken into account, since they can no longer be avoided. In this regard, the costs of previously acquired assets at the disposal of the enterprise, including the depreciation of fixed assets and intangible assets, the acquisition of which is not the result of the implementation of this decision, are not taken into account as alternative ones.

4. Projects that provide cash inflows, the present value of which exceeds the value of the opportunity costs associated with them, increase the value of the enterprise, that is, make the owners of the enterprise richer.

Introduction

Opportunity cost (s)) is an economic term denoting the loss of profit (in the particular case, profit, income) as a result of choosing one of the alternative options for using resources and, thereby, abandoning other possibilities. The amount of lost profit is determined by the utility of the most valuable of the discarded alternatives. Opportunity costs are an inseparable part of any decision making.

Opportunity costs are not expenses in the accounting sense, they are just an economic construct for accounting for lost alternatives.

If there are two investment options, A and B, and the options are mutually exclusive, then when assessing the profitability of option A, it is necessary to take into account the lost income from not accepting option B as the cost of a missed opportunity, and vice versa.

1. Alternative "explicit" and "implicit" costs

Most of the cost of production is the use of production resources. If the latter are used in one place, then they cannot be used in another, since they have such properties as rarity and limitedness. For example, the money spent on the purchase of a blast furnace for the production of pig iron cannot be simultaneously spent on the production of ice cream. As a result, by using some resource in a certain way, we lose the ability to use this resource in some other way.

By virtue of this circumstance, any decision to produce something necessitates the refusal to use the same resources for the production of some other types of products. Thus, costs are opportunity costs.

Opportunity cost is the cost of producing a good valued in terms of the lost opportunity to use the same resources for other purposes.

To see how the opportunity cost can be estimated, let's take Robinson on a desert island as an example. Suppose that near his hut he grows two crops: potatoes and corn. Land plot limited: on one side - the ocean, on the other - the jungle, on the third - rocks, on the fourth - Robinson's hut. Robinson decides to increase corn production. And he can do this in only one way: to increase the area allocated for corn by reducing the area occupied by potatoes. The opportunity cost of producing each subsequent cob of corn in this case can be expressed in terms of potato tubers that Robinson did not receive by using the potato land resource to grow corn.

But this example is for two products. But what if there are dozens, hundreds, thousands of them? Then money comes to the rescue, by means of which all other goods are commensurate.

Opportunity costs can act as the difference between the profit that could be obtained with the most profitable of all alternative ways of using resources, and the profit actually received.

But not all entrepreneurial costs act as opportunity costs. In any way of using resources, the costs that the manufacturer bears in an unconditional manner (for example, registration of an enterprise, rent, etc.) are not alternative. These non-opportunity costs do not participate in the process of economic choice.

In economics, opportunity costs do not always take the form of cash costs.

For example, an ice cream manufacturer decided to take a break and bought trips to the Canary Islands. The expenses that he made out of his own pocket act as opportunity costs: after all, for this amount he (the manufacturer) could expand the production of ice cream (buy or rent premises, purchase additional raw materials or equipment) if this production will bring profit. However, while vacationing in the Canary Islands, he does not receive the income from the expansion of production, which he could have received if he had not left and did not use this resource differently. Lost or not received income is also included in the opportunity cost, although it is not a direct monetary expense (this is not what he spent out of his own pocket, but what he did not receive in his own pocket).

Thus, the opportunity cost in the economy is the sum of opportunity cash costs and lost cash income.

Opportunity costs faced by firms include payments to workers, investors, and owners of natural resources. All these payments are made in order to attract factors of production, diverting them from alternative uses.

From an economic point of view, opportunity costs can be divided into two groups: "explicit" and "implicit".

Explicit costs are opportunity costs that take the form of cash payments to suppliers of factors of production and intermediate products.

Explicit costs include: wages of workers (cash payment to workers as suppliers of the factor of production - labor); cash costs for the purchase or payment for the lease of machine tools, machinery, equipment, buildings, structures (monetary payment to suppliers of capital); payment transport costs; communal payments(light, gas, water); payment for services of banks, insurance companies; payment of suppliers material resources(raw materials, semi-finished products, components).

Implicit costs are the opportunity costs of using resources owned by the firm itself, i.e. unpaid expenses.

Implicit costs can be represented as:

1. Cash payments that the firm could receive with a more profitable use of its resources. This can also include lost profits (“opportunity costs”); wages, which an entrepreneur could get by working somewhere else; interest on capital invested in securities; land rents.

2. Normal profit as the minimum remuneration to the entrepreneur, keeping him in the chosen branch of activity.

For example, an entrepreneur engaged in the production of fountain pens considers it sufficient for himself to receive a normal profit of 15% of the invested capital. And if the production of fountain pens gives the entrepreneur less than a normal profit, he will transfer his capital to industries that give at least a normal profit.

3. For the owner of capital, implicit costs are the profit that he could receive by investing his capital not in this, but in some other business (enterprise). For the peasant - the owner of the land - such implicit costs will be the rent that he could receive by renting out his land. For an entrepreneur (including a person engaged in ordinary labor activity) as implicit costs will be the wages that he could receive (for the same time), working for hire at any firm or enterprise.

Thus, in the production costs of the Western economic theory the income of the entrepreneur is included (in Marx it was called the average return on invested capital). At the same time, such income is considered as a payment for risk, which rewards the entrepreneur and encourages him to keep his financial assets within the limits of this enterprise and not divert them for other purposes.

2. Accounting for opportunity costs in small business

The formation of the composition of production costs and their accounting are important for any organization, small businesses especially need such formation.

Costs are the monetary expression of costs production factors necessary for the enterprise to carry out its production and commercial activities. They find their expression in terms of the cost of production, which characterize in monetary terms all material costs and labor costs that are necessary for the production and sale of products.
The quantity of a product that a firm can offer on the market depends, on the one hand, on the level of costs (costs) for its production and on the price at which the product will be sold on the market, on the other. From this it follows that knowledge of the costs of production and sale of goods is one of the most important conditions for the effective management of the enterprise.
In real production activities it is necessary to take into account not only the actual monetary costs, but also the opportunity costs.
The opportunity cost of any solution is the best of all other possible solutions. The opportunity cost of using resources is the cost of using resources at the best of other possible alternative uses. The opportunity cost of the labor time that an entrepreneur spends running his business is the wage he gives up by not selling his business. labor force to another, not his own enterprise, or the cost of free time, which the entrepreneur donated - whichever is greater. Therefore, the expected income from the type of activity in a small business, on average for the year, should exceed the maximum possible alternative income of an entrepreneur in another type of activity.
Opportunity costs include such as payment of wages to workers, investors, payment of resources. All these payments are intended to attract these factors, thereby diverting them from their alternative use.
Explicit costs are opportunity costs that take the form of direct (cash) payments for factors of production. These are such as: payment of wages, interest to the bank, fees to managers, payment to providers of financial and other services, payment of transportation costs and much more. But the costs are not limited to the explicit costs incurred by the enterprise. There are also implicit (implicit) costs. These include the opportunity costs of resources directly from the owners of the enterprise. They are not fixed in contracts and therefore remain under-received in material form. So, for example, steel used to make weapons cannot be used to make cars. Businesses usually do not record implicit costs in financial statements but that doesn't make them smaller.
Considering that small businesses are mainly firms and organizations with a small initial capital, and the organizers of such firms are often middle-class people who do not have the opportunity to constantly compensate for the losses of their enterprise. It can be concluded that accounting for opportunity costs by small businesses is mandatory. Because only with the help of this accounting, a small business will be able to exist and bring to the owner Fixed salary. Also, at the initial stage of a small business, accounting for opportunity costs can help its owner determine the feasibility of further work in his chosen industry. This is especially important for small businesses, because small business owners do not have the opportunity to risk the money invested in the business.

In fact, accounting for opportunity costs in small business is a condition for its existence.

As already noted, revenue is income from the sale of products, and sub-costs are understood as the costs of the company for the production and sale of products. The difference between them is profit.

There are two interpretations of costs, which are called accounting and economic.

Accounting costs are the explicit costs associated with paying for resources that do not belong to the enterprise itself, and are taken into account when calculating its remaining profit. These include:

Depreciation of fixed assets:

Costs of raw materials, components, energy;

wages of workers and employees;

rent payments;

payment for services of third parties;

tax payments;

payment of interest on loans.

The difference between revenue and accounting costs forms accounting (net economic) profit. The term "accounting" means accounting costs and should not be interpreted as costs calculated according to accounting rules. Accounting costs are sometimes called external (explicit cost), as they express the cost of resources that are owned by others.

For a comparative assessment of different investment options, in addition to accounting (explicit) costs, it is also necessary to take into account implicit costs - the costs of lost profits. Suppose that an entrepreneur who has invested in the business a capital of 100 monetary units, completely consumed during the year, has produced and sold products for 110 monetary units by the end of this year, while receiving 10 units of accounting profit. The return on his capital was 10%. Was the business development option he chose economically justified if the annual interest rate paid by the bank on deposits was 15%? Obviously not. The chosen investment option brought him a loss of 5 monetary units compared to a bank deposit. This example shows that the cost of lost profits, equal in magnitude to the income from the best of the other business development options, should be considered as implicit costs. They can be called internal (implicit cost), as they show the hidden cost of resources owned by the firm itself. As part of implicit costs, the rate of return (hidden interest on equity) and the rate of return (hidden wages of the entrepreneur himself).

Explicit (accounting) and implicit costs together form economic (opportunity) costs. They show the cost of all resources used by the firm - both own and borrowed. The difference between revenue and economic costs is economic profit, that is, the excess of accounting profit over the return on the best of the alternative capital investments. The receipt by the enterprise of zero economic profit does not mean that its activities are deprived of economic sense. This only indicates that its return is equal to the return on the use of capital in other options for its use.

Costs include costs associated with sunk costs - long-term investments in assets that do not have an alternative application. It is not possible to stop these costs, so they are also called sunk costs. Imagine that an entrepreneur has acquired highly specialized equipment for the production of products that have not found demand. He will not be able to use it for other purposes, it will also be difficult to sell it. Therefore, in anticipation of the emergence of demand for products, such equipment will be stored, subject to physical and moral wear and tear (amortizing). This depreciation is an example of a sunk cost.

Conclusion

Opportunity cost is an economic term that refers to the loss of profit (profit) as a result of choosing one of the alternative options for using resources. The opportunity cost is the opportunity cost.

A simple example is given by the well-known anecdote about a tailor who dreamed of becoming a king and at the same time "would be a little richer, because he would sew a little more." However, since it is impossible to be a king and a tailor at the same time, the profits from the tailoring business will be lost. They should be considered lost profits when ascending the throne. If you remain a tailor, then the income from the royal office will be lost, which will be the opportunity cost of this choice.

Bibliography

1. Economy. Textbook / Edited by A. I. Arkhipov, A. N. Nesterenko, A. K.

Bolshakov. M .: "Prospect", 2005

Humanitarian Publishing Center VLADOS, 2006

3. Fisher S., Dornbusch R., Schmalenzi R. Economics: Translation from English from the 2nd

editions. - M.: Delo, 2006

4. Makkonel KR, Brew SL Economics: Principles, problems and politics. In 2 tons.

5. Modern economy. Public course. Rostov-on-Don.

A term denoting lost profit (in a particular case - profit, income) as a result of choosing one of the alternative options for using resources and, thereby, refusing other opportunities. The amount of lost profit is determined by the utility of the most valuable of the discarded alternatives. Opportunity costs are an integral part of any decision making. The term was introduced by the Austrian economist Friedrich von Wieser in his monograph The Theory of Social Economy in 1914.

Opportunity costs can be expressed both in kind (in goods, the production or consumption of which had to be abandoned), and in the monetary equivalent of these alternatives. Also, opportunity costs can be expressed in hours of time (lost time in terms of its alternative use).

The theory of opportunity cost is described in the monograph "The Theory of the Social Economy" in 1914. According to her:

The contribution of von Wieser's opportunity cost theory to economics is that it is the first description of the principles of efficient production.

Opportunity costs are not expenses in the accounting sense, they are just an economic construct for accounting for lost alternatives.

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Economics - Introductory Lecture: Core Problem, Opportunity Cost, CPV

Depreciation and the opportunity cost of capital

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Let's say we decide to stick with Scenario E for a few days. On average, we catch one hare per day and pick 280 berries. Probably, at that time we wanted more berries. This is scenario E. But now we suddenly want more protein. Let's write: we stick to scenario E, but we wanted protein. So you need to think about ratios. If we want to catch more rabbits, we need to understand that if I want to catch another rabbit, I will have to give up something. If I catch one more rabbit, we will go from one rabbit a day to two, that is, from scenario E to scenario D. What will we give up? So, here we write +1, And it turns out that we refuse 40 berries. Visually, this can be shown here. If I want to catch another rabbit, I won't be able to move into that out-of-reach zone from the curve. I have to stay on the production possibilities frontier, sometimes you can see a reduction in the GPV. Or you can call it an abbreviation. If I want another rabbit, the production possibilities frontier will drop, and I'll have to give up 40 berries. That is, one more rabbit means that there are costs. On average, I lose 40 berries. 40 berries. There is a term to describe what we have just discussed - the opportunity cost of getting one more rabbit for me would be 40 berries. Let's write down. The opportunity cost of another rabbit. The opportunity cost of another rabbit. These are the overheads for Scenario E, but as we shall see, they will vary depending on the scenario chosen, at least for this example. The opportunity cost of one additional rabbit is 40 berries. Scenario E. For the sake of another rabbit, I have to give up 40 berries. Another term needed to talk about the opportunity cost of, say, production is the opportunity cost of producing one more rabbit, or the opportunity cost of producing one more unit of output. They are sometimes referred to as marginal costs. So this can be seen as marginal cost. In our video, the cost refers to what we refuse, a possible alternative. In other examples, marginal cost will sometimes be expressed in monetary units, such as dollars. What was the cost of producing an additional unit of output? Let's make sure we've dealt with the opportunity cost. So we stick with Scenario E, where we have the opportunity cost of another rabbit. But what will be the opportunity cost if, say, we are tired of eating meat. We stuck with Scenario E, but we decided to go vegetarian and move on to Scenario F: we forego rabbits and want to eat as much fruit as possible. Regarding scenario E, one can also ask the question: what will be the opportunity cost? Let's write it easier: the cost of another 20 berries will be minus one rabbit. So, the cost of another 20 berries will be minus one rabbit. We do the following. I want to increase the number of berries by 20, but to do this, I need to decrease the number of rabbits by one. The opportunity cost, if we stick to Scenario E, from an additional 20 berries would be equal to one rabbit. One rabbit. So it's not marginal cost, because I'm talking about the cost of 20 more units of output, not just one. If we are talking about the marginal cost of one more berry, then let's say that 20 berries equal one rabbit, i.e. we will need to divide both parts by 20. So, divide both parts by 20. The extra berry, suppose it will be here if you're interested in seeing it on a graph. Another berry, divided by 20, will be equal to 1/20 of the rabbit. That is, according to scenario E, if I want another berry, on average I will get 1/20 less rabbits. 1/20 less rabbits. If we represent it in this way, then it will be called marginal cost. For those who want to see it on a graph, this curve, maybe it's not very accurate, let's not try to depict everything absolutely exactly, the curve is for one berry, we can be sure of this, the opportunity cost of 20 additional berries is equal to one rabbit , but if we imagine that we have a straight line here, it is not so curved, imagine that there is a straight line between these two points, then the opportunity cost of 1 berry is 1/20 of a rabbit, the marginal cost of an additional berry is 1/20 of a rabbit. We can do it at other points on the curve, and I suggest you do it based on the table we made in the last video and on this curve. Consider what the opportunity cost will be in different scenarios. For example, if you are on scenario B and you want another rabbit, how many berries will that cost you?

Example

If there are two investment options, A and B, and the options are mutually exclusive, then when assessing the profitability of option A, it is necessary to take into account the lost income from not accepting option B as the cost of a missed opportunity, and vice versa.

A simple example is given by the well-known anecdote about a tailor who dreamed of becoming a king and at the same time "would be a little richer, because he would sew a little more." However, since being a king and a tailor simultaneously impossible, then the profits from the tailoring business will be lost. This should be considered lost profit upon ascension to the throne. If you remain a tailor, then the income from the royal position will be lost, which will be opportunity cost this choice.