Principles of Economics/Opportunity Costs
The opportunity cost of a good or of performing an action, also known as the greatest cost, is the lost value of alternate options that could have been chosen, rather than the one that was chosen. If A gives twice as much pleasure as B, and there is no C that gives more pleasure than B and is comparable (such as uses time, effort, or some other resource), then A's opportunity cost is the benefit of B because that is the difference in resulting happiness. In this particular scenario, the opportunity cost of A is not a good indicator of its value, because it says that A is worth only as much as B, which is not the case.
Normally, there would be many alternate uses for the resources of A/B, so that there would not be such a notable difference, and so A and B would be similar in benefits, B and C would be similar in benefits, etc. In such a case where the differences are minor, the opportunity cost of A would be similar to that of B, and that would reflect their similar benefits.
Oftentimes, opportunity cost is seen as what one would have to give up for something else:
- Opportunity cost of A (in terms of B) =
- is the gain of marginal utility because of a gain of A = 1
- is the loss of marginal utility because of a loss of B
Opportunity costs can also be thought of as the resources lost, or alternate products forgone, through taking a particular action or producing a certain product. The lost resources could be time, effort, money, goods, etc.
Opportunity Cost Principle: Heaberler and Taussing have developed this important cost principle. This principle studies about the various alternatives and their benefits. According to this principle the managerial decision must be such that from the selected alternative benefits.