So you may choose a local one that isn’t as good in order to save time and effort. For instance, it may take time to go to your favorite restaurant, but also the effort of driving or walking there. Time and effort are essentially interlinked. Nevertheless, it is up to the individual to value their time accordingly based on each individual scenario. If you are currently working for a wage of $15 an hour saving yourself $0.50 for 10 minutes may seem illogical. For instance, it may be $0.50 cheaper to go to the store down the road, but is it worth the extra 10 minutes? So each purchasing decision taken bears this in mind. Whether you’re Bill Gates, Warren Buffett, or your next-door neighbor. TimeĮveryone has the same 24 hours in a day. By comparison, a billionaire is unlikely to value price as high as the three other factors. As a result, this would be a more favorable option due to the pricing. Eating breakfast at home, for example, is cheaper. Those will lower levels of income are more likely to place more emphasis on price as part of the opportunity cost. Perhaps one of the biggest factors is the price although this can vary depending on income. When making decisions, there are four common factors that we consider. This is generally considered as the opportunity cost but is commonly This is the next-best product but is one that you You may very wellĬhoose a close substitute instead. Into a store and they did not have the item you want in stock. To the consumer, aīlack Coffee may be the second-best alternative. That may be getting a Black Coffee instead of a Latte. The value that the consumer receives is known as the consumer surplus, which is simply the additional value they receive from consuming the product below their willingness to pay.Įconomists often refer to the opportunity cost as the next best alternative that isįoregone. So when a consumer purchases a Starbucks, its value is greater than the $5 paid for it. In economics, it is assumed that this chosen option is the most valued and most optimal. One is chosen and the others are foregone. Opportunity cost requires trade-offs between two or more options. What is Meant by Opportunity Cost in Economics? So whilst the Croissant saves time and effort, it costs more than breakfast at home and gives the consumer lower satisfaction than a full breakfast. When considering opportunity cost, it is also important to consider ‘utility’, which is essentially, how much pleasure/enjoyment the individual gets. This could be a bottle of Cola, a Pretzel, or some French Fries. The opportunity cost is what could have been brought instead of a Croissant. When the consumer buys a Croissant, they forego $2, or however much it costs. These are decisions taken in minutes or seconds. Yet consumers don’t sit down thinking about this decision for hours or days. A croissant is cheaper than a restaurant lunch but more expensive than breakfast at home. They choose this over having breakfast at home or sitting down in a restaurant for a full breakfast. This then allows us to come to a decision which best optimizes how much we value each of these factors.Ī consumer may purchase a croissant on the way to work. Our brains simultaneously consider factors such as time, effort, and money. However, because we make so many decisions every day, our brain stores previous decisions we made and uses them to help speed up the decision process. When we make a purchasing decision, we subconsciously consider several factors before making a decision. That can come in the form of time, money, effort, or ‘utility’.” “Opportunity cost is the cost of making one decision over another.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |