Opportunity Cost

7 Oct No Comments

Think of an example in your personal life where the concept of opportunity cost plays (or should play) an important role in your decision making. What are the opportunity costs and benefits of your decision?

The first thing that came to mind when I read this question was going out to dinner with my fiancé. The opportunity cost would be the dollar amount we spend on the meal and the amount of time the dinner takes. It would cost much less if we ate dinner at home, and the time spent going out could be used doing something more productive. The benefits are getting to spend a nice evening with my fiancé and not having to prepare a meal myself.

Now, imagine you are a manager for a small business or firm (you decide the type of business). You have an extra $5,000 in the budget to spend. How do you decide how to spend this money? How do you use the concept of opportunity cost to make this decision?

I manage a small shoe boutique. We recently discovered an extra $5,000 in our budget. We do not produce a ton of revenue due to the size of our business and not being very well known. I have decided it would be a good idea to create a website for our business so that people can see and buy our products from all over the US. This is what I have decided to spend the extra $5,000 on. I made this decision because I am expecting the return will be much greater than my investment in the website. It is somewhat risky, but you must spend money to make money. I believe the reward outweighs the risk in this situation.




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