Opportunity Cost
Decisions, decisions, decisions!
Suppose I have £50 in my pocket when I go shopping. I really want to buy a pair of jeans. They cost £50. But, I also really want an Adidas hoodie. That also costs £50.
Clearly, I can't buy both, as I can only spend the £50 once. So, if I decide to buy the jeans, I can't buy the hoodie. And vice versa. I have to make a choice. The item that I don't choose is known in business as the Opportunity Cost.
Suppose I have £50 in my pocket when I go shopping. I really want to buy a pair of jeans. They cost £50. But, I also really want an Adidas hoodie. That also costs £50.
Clearly, I can't buy both, as I can only spend the £50 once. So, if I decide to buy the jeans, I can't buy the hoodie. And vice versa. I have to make a choice. The item that I don't choose is known in business as the Opportunity Cost.
Businesses have to make big decisions all of the time. We say that money is 'finite' (the opposite of infinite), meaning that they haven't got endless supplies of it. Once they've spent a pound on something, they can never spend that same pound again. Kind of like 'once it's gone, it's gone'!
So for example, a business might need a new van or a new member of staff. The new van will cost £10,000. The wages for the worker will be £10,000. If the company only have £10,000 available, they have to make a choice. The thing that they don't choose is known as the opportunity cost.
We say: The business chose to buy the van for £10,000 so the opportunity cost was that they couldn't have the new member of staff.
So for example, a business might need a new van or a new member of staff. The new van will cost £10,000. The wages for the worker will be £10,000. If the company only have £10,000 available, they have to make a choice. The thing that they don't choose is known as the opportunity cost.
We say: The business chose to buy the van for £10,000 so the opportunity cost was that they couldn't have the new member of staff.