How to calculate opportunity cost

1. Opportunity cost refers to the maximum income of producing other products when producing one product with certain economic resources. Opportunity cost is an important concept in economic principles. Opportunity cost exists in the formulation of national economic plan, the feasibility study of new investment projects, the development of new products and even the choice of workers. It provides a logical and powerful answer for the correct and reasonable choice. When making a choice, striving for a smaller opportunity cost is one of the most important criteria for economic activities.

2. Take the following example as a calculation example: Opportunity cost

When farmers get more land, if they choose to raise pigs, they can't choose to raise other poultry. The opportunity cost of raising pigs is the gain of giving up raising chickens or ducks. Suppose you can get 90 thousand yuan for raising pigs, 70 thousand yuan for raising chickens and 80 thousand yuan for raising ducks, then the opportunity cost of raising pigs is 80 thousand yuan, the opportunity cost of raising chickens is 90 thousand yuan, and the opportunity cost of raising ducks is 90 thousand yuan.

About opportunity cost

1. Opportunity cost refers to the opportunity for an enterprise to give up another business activity in order to engage in one business activity, or to give up another income when using a certain resource to obtain a certain income. The income or income of another business activity is the opportunity cost of the business activity. Through the opportunity cost analysis, enterprises are required to correctly choose business projects in their operations, and the actual benefits must be greater than the opportunity cost, so that limited resources can be optimally allocated.

2. Premise

The prerequisite for economic analysis using the concept of opportunity cost is:

Resources are scarce.

Resources have many uses.

Resources have been fully utilized.

Resources can flow freely.

3. Special features

(1) Opportunity is optional.

Opportunity cost refers to the opportunities that decision makers can choose. If it is not a project that decision makers can choose, it is not an opportunity for decision makers. For example, if a farmer can only raise pigs and chickens, then raising cattle will not be an opportunity for a farmer.

(2) The opportunity cost is profitable.

The project with the highest income among abandoned opportunities is opportunity cost, that is, opportunity cost is not the sum of the income of abandoned projects. For example, a farmer can only choose between raising pigs, chickens and cows, if the income relationship between them is cattle >; Raising pigs > raising chickens, the opportunity cost of raising pigs and raising chickens is raising cattle, and the opportunity cost of raising cattle is only raising pigs.

(3) Opportunity cost and scarcity of resources

Choosing one thing in a scarce world means giving up other things. The opportunity cost of choice is the value of the abandoned goods or services. Opportunity cost refers to the maximum income that can be obtained by using a certain resource to produce a certain product under the condition of limited resources.

(Reference:

Baidu Encyclopedia: Opportunity Cost)