What is Opportunity cost and its importance in decision making?

        The opportunity cost is one of the most important concepts of microeconomics. It is the benefit that the decision maker loss by choosing another option. The opportunity cost is referred as the cost of cost of alternative when one activity is chosen over another. It is also considered as the value of the forgone activity over the selected one. The opportunity cost is involved in a decision when a trade-off is involved between the two or more available options. It can also be describe as the relative cost of an alternative that is compromised in order to acquire the best alternative. The opportunity cost is a significant economic concept that is used in a broader range of business decisions (Forbes 2012)

Example

        When someone selects to spend the money on vacation rather than using it for home renovation, the benefits of living in a remodel house is the opportunity.

When a business decides to purchase furniture than the opportunity of investing the money in another option is the opportunity cost.

Factors to consider

The Opportunity cost is applied in many aspect of our daily life. However, it is important following three factors in mind while accessing the opportunity cost:

In order to make a well informed and proficient decision it is important to access the value of an opportunity on the basis of both the associated cost and benefits.

To select the best possible alternative the broader future benefits of the alternatives must be accessed along with the monetary benefit.

To make the best decision it is important to assess every alternative on the same criteria (Shepherd 2015)

Importance in decision making

        On the daily basis lots of decisions are taken on every level including personal, corporate and governmental level. In every decision one alternate is selected over the other and knowingly or unknowingly the opportunity cost is incurred by every decision makers. The opportunity cost plays a key role in the decision making process of business. Corporate decision makers have to take very critical decision on daily basis to ensure the organizational success. The management has to decide that which opportunity to pursue and which to compromise.

In such situation, the Opportunity cost is much more than just the monitory value of an alternative. It includes loss of energy, time and derived pleasure/utility of the forgone alternative. Therefore, the business organization considered both the explicit and implicit costs while making any decision.  Explicit cost can be easily measured and estimated whereas sometime it become difficult of the organizations to measure and estimate the implicit cost. In such situation accounting cost is considered for the book keeping.

        The opportunity cost is important and valuable for business organization only instead the common people can use this concept to make better decision. The common people are also incurring opportunity cost unknowingly such as when they hold their money in terms of cash they think they are incurring any cost but in real they are unaware about the forgone opportunity which might be used to increase their money and give them a better life. (Greco 2016)

Conclusion of Opportunity cost and its importance in decision making?

        The opportunity cost has considerable importance in decision making. However, it not only useful for the corporate decision making rather it is equally important for the common people to consider the opportunities cost in order to ensure the selection of  the best option among all the scarce resources. Moreover, opportunity cost also enables the decision makers to increase the utility of the resources. Likewise, it is important for the business organization to consider both the economic cost and profits associated with the available alternative in order to ensure better profit making and increased revenues.

References of Opportunity cost and its importance in decision making?

Forbes. 2012. The Role Of Opportunity Cost In Financial Decision Making. Accessed November 27, 2018. https://www.forbes.com/sites/investopedia/2012/08/21/the-role-of-opportunity-cost-in-financial-decision-making/#536ac7203e60.

Greco, Salvatore, J. Figueira, and M. Ehrgott. 2016. Multiple criteria decision analysis. Springer.

Shepherd, Dean A., Trenton A. Williams, and Holger Patzelt. 2015. "Thinking about entrepreneurial decision making: Review and research agenda." Journal of management 41 (1): 11-46.