Opportunity costs

Opportunity costs arise when making a decision . If you choose between A, B or C, and decide on A, then you forego the benefits of B (opportunity costs of B) and C (opportunity costs of C).

Opportunity "costs" are therefore not a real financial expense in terms of cost and performance accounting . They describe the assumed benefit that one foregoes if one decides against the respective alternative. Hence the synonyms alternative costs and waiver costs , also costs of repentance and costs of lost profits .

If there is no alternative whose opportunity costs are higher than the benefits of the actual choice, the decision is optimal .

A contradicting concept are the (additional) costs that are saved by deciding against the respective alternative: the opportunity proceeds .

Types of opportunity cost

According to their type, opportunity costs - based on the production process - are divided into input and output-related opportunity costs.

Input-related opportunity costs

Input-related opportunity costs result from the fact that the contribution margin of the goods produced is relativized to the input factor (working hours, pieces, tons, etc.) (→ relative contribution margin). Contribution margins do not necessarily have to be used to assess the opportunity costs. They can also be assessed through a relative consideration of lost customer acquisition, lost market share or lost sales. In general, however, the assessment of lost unit profit margins has prevailed, as these can be compared more easily.

Output-related opportunity costs

Output-related opportunity costs are "costs" (lost profit margins) of an alternative that are not related to the input but to the output of the production process. A distinction is made here between alternative costs (opportunity costs that deviate from the next best alternative) and optimal costs (deviation of the selected alternative from the optimal use).

Alternative costs can be used to compare different production programs in a company. Optimal costs, on the other hand, only evaluate an alternative in comparison to the optimal production program. However, most of the time, the concept of opportunity cost can only be used to evaluate alternatives after decisions have already been made. So they only allow an ex-post analysis.

Application areas of opportunity costs

Based on its fundamental construct, the concept of opportunity costs is used in both business and economic areas.

Business application (examples):

1. Decision on additional orders
2. Determination of the optimal production program
3. Opportunity-cost-oriented driving prices
4. In the investment analysis the rate of interest with a comparable alternative investment could be achieved (English: opportunity cost of capital )

Economic application (examples):

1. Theory of comparative cost advantages
2. Concept of the transformation curve
3. for the lost benefit
4. As the sum of explicit costs (= absolute, actual costs) and implicit costs (= theoretically possible income that could be generated in the same time by doing another conceivable thing.)

Examples

• A company that owns an office building and uses it itself. The company could generate income by renting this building. These lost revenues are known as opportunity costs.
• In social and family policy , opportunity costs play a role in the sense of a loss of earned income and the professional career development of the individual due to housework and family work, especially raising children. The Ministry of Family Affairs (BMFSFJ) names the loss of earnings, the loss of pension entitlements and an increased employment risk as opportunity costs of bringing up children. A professional break that extends over many months or years also entails dequalification .
• With the transport concept of free local transport , the transport company misses out on ticket revenue (in favor of the benefit to society as a whole); these represent the opportunity costs.
• Opportunity costs also denote the "lost" benefits of a product A, which arise if A is dispensed with in favor of the consumption of product B (for example due to a budget restriction ).
• The opportunity costs of state “savings policy” add up from the lost opportunities to strengthen the economy in the short term and the economic growth potential in the medium term; possible tax revenues are given away in this way.

See also

• Shadow price

Web links

Wiktionary: opportunity costs  - explanations of meanings, word origins, synonyms, translations

Commons : Transformation Curves  - collection of images, videos and audio files

Individual evidence

1. ↑ Justice for families. For the establishment and further development of the family burden and family benefit equalization. (PDF; 2.5 MB) (No longer available online.) BMFSFJ , archived from the original on July 21, 2011 ; Retrieved June 25, 2010 . Info: The archive link was inserted automatically and has not yet been checked. Please check the original and archive link according to the instructions and then remove this notice. S. XIX ( Memento of the original from July 21, 2011 in the Internet Archive ) Info: The archive link was automatically inserted and not yet checked. Please check the original and archive link according to the instructions and then remove this notice.    
2. ↑ OECD : Income inequality in Germany in the middle, wealth inequality high , from May 21, 2015, accessed on September 4, 2017.
3. ↑ Rudolf Hickel : From Rheinischen to Turbo-Kapitalismus In: Blätter für deutsche und internationale Politik , 12/2006, S. 1475.