How To Utilize Opportunity Costs?

Definition:

Opportunity costs are the value of the ideal alternative that you chose against; this concept mainly involves finances. Understanding this helps you be cognizant: of whether you made the wisest choice for profit.

Examples:

Let me break it down with examples because this is not the easiest concept to recognize, but it’s crucial because opportunity costs are: encountered daily. It could be determined with governmental spending, prioritizing your money and time on healthcare above education. Another example could be something as simple as choosing cornflakes over Cocoa Puffs.

Calculations:

Determining whether you chose the right choice or not is based on the formula: Opportunity Cost = Return on the best-foregone alternative – Return on your chosen option. An example is investing $500 into Coca-Cola, gaining a $200 profit, and investing with Sprite would have been a $600 profit. Using the formula, $600-$200= $400 as your opportunity cost; the amount of money you missed out on.

Utilizing Opportunity Costs:

You should analyze the best alternative and prepare the benefits and drawbacks of both options. If it’s financial, you can also review their past stocks and determine which company performed the best. Opportunity costs are beneficial if you’re indecisive; it forces you to look more in-depth rather than act on impulses. You can also rely on this alternative as a backup if the first one doesn’t work out as well as anticipated.