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Opportunity cost

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Opportunity cost

In utility should also be considered opportunity costs.

History

The term was coined in 1914 by Austrian economist Friedrich von Wieser in his book Theorie der gesellschaftlichen Wirtschaft.[4] It was first described in 1848 by French classical economist Frédéric Bastiat in his essay "What Is Seen and What Is Not Seen".

Opportunity costs in production

Explicit costs

Explicit costs are opportunity costs that involve direct monetary payment by producers. The explicit opportunity cost of the factors of production not already owned by a producer is the price that the producer has to pay for them. For instance, if a firm spends $100 on electrical power consumed, its explicit opportunity cost is $100.[5] This cash expenditure represents a lost opportunity to purchase something else with the $100.

Implicit costs

Implicit costs (also called implied, imputed or notional costs) are the opportunity costs not reflected in cash outflow but implied by the failure of the firm to allocate its existing (owned) resources, or factors of production to the best alternative use. For example: a manufacturer has previously purchased 1000 tons of steel and the machinery to produce a widget. The implicit part of the opportunity cost of producing the widget is the revenue lost by not selling the steel and not renting out the machinery instead of using them for production.

Evaluation

Note that opportunity cost is not the sum of the available alternatives when those alternatives are, in turn, mutually exclusive to each other – it is the next best alternative given up selecting the best option. The opportunity cost of a city's decision to build the hospital on its vacant land is the loss of the land for a sporting center, or the inability to use the land for a parking lot, or the money which could have been made from selling the land. Use for any one of those purposes would preclude the possibility to implement any of the other.

See also

References

  1. ^ "Opportunity Cost". Investopedia. Retrieved 2010-09-18. 
  2. ^  
  3. ^ "Opportunity Cost". Economics A-Z. The Economist. Retrieved 2010-09-18. 
  4. ^  
    Friedrich von Wieser (November 1914). Theorie der gesellschaftlichen Wirtschaft [Theory of Social Economics] (in German). Original publication. 
  5. ^ Explicit vs. Implicit Cost
  6. ^  

Further reading

External links

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