Who is the propounder of the concept of opportunity cost

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Opportunity Cost Definition Opportunity cost is the value of what you lose when you choose from two or more alternatives. Opportunity Cost Examples Opportunity costs are embedded in the fabric of everyday life.

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Measure content performance. Develop and improve products. List of Partners vendors. Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. Because opportunity costs are, by definition, unseen, they can be easily overlooked. Understanding the potential missed opportunities when a business or individual chooses one investment over another allows for better decision-making.

The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. Say that you have option A—to invest in the stock market hoping to generate capital gain returns. Meanwhile, Option B is to reinvest your money back into the business, expecting that newer equipment will increase production efficiency, leading to lower operational expenses and a higher profit margin. In other words, by investing in the business, you would forgo the opportunity to earn a higher return.

While financial reports do not show opportunity costs, business owners often use the concept to make educated decisions when they have multiple options before them. Bottlenecks , for instance, often result in opportunity costs. Opportunity cost analysis plays a crucial role in determining a business's capital structure.

A firm incurs an expense in issuing both debt and equity capital to compensate lenders and shareholders for the risk of investment, yet each also carries an opportunity cost. Funds used to make payments on loans, for example, cannot be invested in stocks or bonds, which offer the potential for investment income.

The company must decide if the expansion made by the leveraging power of debt will generate greater profits than it could make through investments. A firm tries to weigh the costs and benefits of issuing debt and stock, including both monetary and nonmonetary considerations, to arrive at an optimal balance that minimizes opportunity costs. Because opportunity cost is a forward-looking consideration, the actual rate of return for both options is unknown today, making this evaluation tricky in practice.

Assume the company in the above example forgoes new equipment and instead invests in the stock market. It is equally possible that, had the company chosen new equipment, there would be no effect on production efficiency, and profits would remain stable.

It is important to compare investment options that have a similar risk. Comparing a Treasury bill , which is virtually risk-free, to investment in a highly volatile stock can cause a misleading calculation. Government backs the rate of return of the T-bill, while there is no such guarantee in the stock market.

When assessing the potential profitability of various investments, businesses look for the option that is likely to yield the greatest return. Often, they can determine this by looking at the expected rate of return RoR for an investment vehicle. However, businesses must also consider the opportunity cost of each alternative option.

No matter which option the business chooses, the potential profit it gives up by not investing in the other option is the opportunity cost. Alternatively, if the business purchases a new machine, it will be able to increase its production of widgets.

The machine setup and employee training will be intensive, and the new machine will not be up to maximum efficiency for the first couple years.

Since the company has limited funds to invest in either option, it must make a choice.