Basic of Opportunity Cost

Opportunity cost

     Opportunity cost is said when we have to choose between two goods or we can say that the value of choice between best alternative. We can also say that the we can choose next highest opportunity value rather than previous. We can also define the opportunity that next best alternative foregone.

EXAMPLE;-

        One of my friend VINAY went to buy a new phone with me un the mobile store in KOLKATA.. the mobile sales man showed him a variety of phone in according to his need and features he wants in his phone. He showed him two phones newly launched that is MI NOTE 5 PRO and SAMSUNG J7 PRIME, nearly same price MI NOTE 5 PRO priced was ₹ 1500 and SAMSUNG J7 PRIME price was ₹ 14500. Vinay choose MI NOTE 5 PRO instead of SAMSUNG J7 PRIME. The opportunity cost was ₹ 14500 because VINAY choose best next alternative goods.

LIFE INSTANCES WITH ECONOMICS

Opportunity Cost- The true cost of something is when one alternative is selected over the other. It can be on the basis of monetary or non-monetary. It represents an all-inclusive economic cost, which is the sum of explicit and implicit cost.

Example- When you attend a movie, the opportunity cost includes not only the cost of the tickets and transportation but also the time required to view the movie should be taken into account.

A football player attends training to be a better player instead of taking a vacation. The opportunity cost was the vacation.

Utility- It is defined as the power of a commodity or service to satisfy human wants. The utility is thus the satisfaction derived by the consumers by consuming the good.

Example- The utility of a non-veg food dish is zero to a vegan while it has a very high utility for non-veg foodie person.

The utility of a pack of cigarette is zero for a person who is a non-smoker while it has a very high utility for a smoker.

Cardinal Utility- Cardinal utility gives a value of utility to different options. It is basically giving different choices a specific utility value. It is an attempt to measure consumer satisfaction in numerical terms. It is subjective in nature. It varies from person to person.

Example- A person giving a rating in the manner of feedback to a restaurant.
Pratik yields 70 utils of satisfaction from a burger and 30 utils from a pizza.

Ordinal Utility- Ordinal utility is not measuring it but arranging it in order of preference. The consumer only ranks choices in terms of preference but do not give exact numerical values for utility.

Example- A person preferring one restaurant over the other because of having a predetermined order set in his mind.
A person prefers coca-cola over tea when he is thirsty, it means coco-cola has more utility than tea.

Marginal Utility- It is defined as the additional satisfaction or benefit that a consumer derives from buying an additional unit of a commodity or service. It is the increase in the quantity of output by increasing an additional unit of input.

Example- In a manufacturing unit with an increase in the number of employees, production increases.

When a student refers to an additional book on a particular subject other than the class notes, he gains a broader perspective and knowledge on that particular subject.

Insight to live Ecnonomics

1)      UTILITY- The happiness or satisfaction derived from consumption of a product or services (as said by Gregory Mankiw).

Instance 1-After trekking for three hours, I felt exhausted and hungry. Finally, at the top I was lucky to find bread & omelette at a small hut on the hill top. The satisfaction derived after consumption of the meal cannot be explained.  

Instance2- Like many of you, I am a fan of Tom Hanks and his remarkable work. I was waiting for his movie “Angels & Demons”, which was not premiered on nearby multiplex. After a long wait, finally I got the movie from one of my friend.

As we can see in both of the instances that the satisfaction & happiness derived from the fulfilment of the need. This in economics is known as Utility, which can be measured in terms of utils in cardinal utility and by ranks in ordinal utility.

2)      PRODUCTION FUNCTION- The relationship between quantity of input factors used to produce quantity of output.

 Instance1-I worked in a manufacturing unit at a firm as a production planner & supply chain engineer. We saw huge rise in demand and recruited fifteen people to complete our targets and increase production.

Instance2- This is in the same company I used to work, where we went through the installation of another unit of CNC machines to enhance our production and meet the targets.

In instance 1, we see that the variable factor were the workers which were recruited to meet the demand, which can be said shot run function also here is the factor which effects output. Similarly installation of a unit is variable capital factor of long run which might take few months or year to start, but aims at enhanced production in future.

3)      LAW OF DIMNISHING MARGINAL UTILITY- The more of a good that one obtains in a specific period of time, the lesser the additional utility derived from it.  

Instance 1- Me & my brother went to Barbecue in Kolkata which offers unlimited kababs, grills, maincourse & deserts. At first we ate to our hearts content, but then we were not able to go for deserts which was indeed looking delicious.  

Instance 2- This is again an instance in the production unit where at first 10 workers were recruited to increase the output, on the second week there were 5 workers taken in the workshop which enhanced the production by 10 %. Similarly three more workers were recruited to improve more productivity. But the production remained the same.When observed, it was found that the manpower to machine allocation was not helping in production. as there were limited machines and layover of the workers were more. These explains the law of diminishing marginal utility.

1)      INDIFFIRENT CURVES & PRICE CONSTRAINT- Indifference curves shows the choices consumer makes as per his preferences, taking an account his income & satisfaction to achieve more of a particular product & services.

Instance 1-While I was on shopping, I had a tight budget & wanted to go for KFC chicken buckets & watch two movies subsequently. As the budget was fixed, so I had to compromise with one movie & KFC.

Instance 2- I went to grocery to buy wheat & cereals, as budget was tight. I had to compromise with 1 kg of wheat instead of 2 kg to go for 0.5 kg cereals.

These two examples shows that the customers have to make a choice between two products and compromise on one product to derive more utility from other product.

2)      OPPORTUNITY COST- When you give up on something to get some other thing, the cost you gave in to achieve that particular product or services is opportunity cost.

Instance 1- I got a job in BGR Energy as a Sr. Quality Inspector before joining IBA. I took this decision as I always wanted to enrol my career in marketing. Here the lost job opportunities & salaries will be my opportunity cost.

Instance 2- Today as I have to write economics blog & submit within a particular time constraint, hence I spent my time writing & framing examples, in turn I couldn’t rehearse for speech. Hence the time lost in writing the blog is the opportunity cost bared.

Four Principles of Individual Decision Making

Principles of Individual Decision-making

In life, we have to make a decision just about everything that we do. These decisions affect our daily lives and they sometimes they affect the lives of those around us. When making these decisions there are make factors that go into making a final one. In economics there are four principles that effect how a person makes a decision.

List of four principles of individual decision making.

• People face trade-offs.
• The cost of something is what you give up to get it.
• Rational people think at the margin.
• People respond to incentives.

These four principles play an important role in economics. This paper will define each individual principle and then give the rater an insight on a personal decision of the author using the aforementioned principles.

People face trade-offs.

Making a trade-offs is basically, choosing one thing over another. As modern technology advances, one could argue that society has traded-offs battery life in personal electronics for a smaller size and weight of the individual device.

The Cost is What You Give Up

After you have looked at what is being traded-offs, then you can determine the true value of your decision by what you are giving up for it. As in the previous example of personal electronics, giving up battery life has a serious downside in that the personal electronic device will have to charge. Here the cost can be a great one to a person that is constantly on the go.

Rational people think at the margin

Being rational means that an individual will do all that they can to achieve their goal with all that they have available to them. A rational personal thinking at the margin or on the edge will be able to make decisions that allow them to achieve their goal without giving up to much in overall cost. Going back to the personal electronic device, an individual could choose to go with the smaller and more lightweight device because of its portability, but they’ll bring along a portable charging device also, or use the product more sparingly to make the most of the available battery power.

People respond to incentives

An incentive can be carried to something positive like a benefit or something negative like a consequence. Incentives can be a large part of an individual decision making process. The incentive that an individual would most likely respond to when choosing the new personal electronic device would be that they are carrying around less weights, therefore making them more mobile. The consequence side that would affect the decision would be rooted in the fact they will not be able to use the device as much as they would like.

Conclusion

In an economy there are four principle that are vital to the decision making process of how it will distributes its resources. The first is Trade-offs, giving up one thing for another. Then the determination of the cost of what you are giving up to get to your goal. Third, is the thought that rational people think at the margin, meaning one will take advantage of all opportunity to achieve one’s goals. Finally, the principle that people respond to incentives, assists in determining the quantity or price of a certain resource. These principles are also applied in individual decision-making, and the results can affect more than just an individual but an entire economy.

What is "Opportunity Cost" ?

The cost of sacrificing one opportunity is known as opportunity cost. The concept
was first developed by an Austrian economist, Wieser.
This concept compares what is lost with what is gained, based on your decision. The opportunity cost of anything is the alternative that has been foregone. This implies that one product can be produced only at the cost of foregoing the production of another product. Opportunity cost analysis also plays a crucial role in determining a business's capital structure.

Opportunity Cost Equation-
Opportunity cost = Opportunity cost of selected alternative - Cost of next best alternative.

Example 1- The opportunity cost of working for Company A is the value of what we gave up to take the job. We gave up the value of working for Company B, so that is the opportunity cost of choosing to work for Company A.

Example 2-A student considers the cost of a  two years post graduation education by calculating total tution and expanses for the period. They may also Include the opportunity cost of missing 2 years of salary in their calculation.