Opportunity cost theories. Opportunity Cost Model
Opportunity cost is a term that refers to the lost profit when one of the existing alternatives is chosen instead of another. The value of the lost benefit is measured by the utility of the most valuable alternative that was not chosen instead of the other. Thus, opportunity costs occur wherever adoption is necessary. rational decision and there is a need to choose between available options. Thus, opportunity cost is the cost of any one measured in terms of the value of the next best alternative that is foregone. This is a key concept in economics, ensuring the most rational and efficient use limited resources. These costs do not always mean financial costs. They also mean the real cost of the product foregone, time lost, pleasure lost, or any other benefit that provides utility.
Examples opportunity costs a great many can be cited. Every person is faced with the need to make a choice between available options every day. For example, a person who wants to watch two interesting television programs on TV at once, broadcast simultaneously on different channels, but does not have the opportunity to record one of them, will be forced to watch only one program. Thus, his opportunity cost would be not being able to watch one of the programs. Even if he has the opportunity to record one of the programs while watching another, then even in this case there will be an opportunity cost equal to the time spent watching the program.
Opportunity costs can also be assessed during the decision-making process in economic activity. For example, if on farming If you can produce 200 tons of barley or 400 tons of rye, then the opportunity cost of producing 200 tons of barley will be 400 tons of wheat, which has to be abandoned.
To figure out how to estimate opportunity costs, take Robinson on a desert island as an example. Let's say that near his hut he grows two crops: potatoes and corn. Land plot limited: on one side - the ocean, on the other the jungle, on the third - rocks, on the fourth - Robinson's hut. Robinson decides to increase corn production. And he can do this in only one way: to increase the area allocated for corn, reducing the area occupied by potatoes. The opportunity cost of producing each subsequent ear of corn in this case can be expressed in potato tubers, which Robinson lost by using the potato land resource to grow corn.
But this example is for two products. But what if there are dozens, hundreds, thousands of them? Then money comes to the rescue, through which all other goods are measured.
Opportunity costs can act as the difference between the profit that could be obtained under the most profitable of all alternative ways use of resources, and the actual profit received.
But not all entrepreneurial costs act as opportunity costs. With any method of using resources, the costs that the producer bears unconditionally (for example, registering an enterprise, rent, etc.) are not alternative. These non-opportunity costs do not participate in the economic choice process.
Opportunity costs faced by firms include payments to workers, investors, and owners. natural resources. All these payments are made to attract factors of production, diverting them from alternative uses.
From an economic point of view, opportunity costs can be divided into two groups: “explicit” and “implicit”.
Explicit costs are opportunity costs that take the form of cash payments to suppliers of factors of production and intermediate goods.
Explicit costs include: wage workers (cash payment to workers as suppliers of production factors -- work force); cash costs for the purchase or payment for the rental of machines, machinery, equipment, buildings, structures (cash payments to capital suppliers); payment of transportation costs; utility bills (electricity, gas, water); payment for services of banks and insurance companies; payment to suppliers material resources(raw materials, semi-finished products, components).
Implicit costs are the opportunity costs of using resources owned by the company itself, i.e. unpaid expenses.
Implicit costs can be represented as:
1. Cash payments that a company could receive if it used its resources more profitably. This can also include lost profits (“lost opportunity costs”); the wages that an entrepreneur could earn by working somewhere else; interest on capital invested in securities; rent payments for land.
2. Normal profit as the minimum remuneration to an entrepreneur that keeps him in the chosen industry.
For example, an entrepreneur engaged in the production of fountain pens considers it sufficient for himself to receive a normal profit of 15% of the invested capital. And if the production of fountain pens gives the entrepreneur less than normal profit, then he will move his capital to industries that give at least normal profit.
3. For the owner of capital, implicit costs are the profit that he could have received by investing his capital not in this, but in some other business (enterprise). For the peasant - the owner of the land - such implicit costs will be rent, which he could get by renting out his land. For an entrepreneur (including a person engaged in ordinary labor activity) the implicit costs will be the wages that he could have received (for the same time) working for hire in some company or enterprise.
Thus, Western economic theory includes the entrepreneur’s income in production costs (Marx called it the average profit on invested capital). Moreover, such income is considered as a payment for risk, which rewards the entrepreneur and encourages him to keep his financial assets within the boundaries of this enterprise and not divert them for other purposes.
Examples of opportunity costs:
* A person who has $15 can buy a CD or a shirt. If he buys a shirt, the opportunity cost is a CD and if he buys a CD, the opportunity cost is a shirt. If there are more choices than two, the opportunity cost is still not just one item, never all of them.
* When a person comes to the store and is forced to choose between a steak, which costs $20, and trout, which costs $40. By choosing the more expensive trout, the opportunity cost would be two steaks that could have been purchased with the money spent. And, on the contrary, by choosing a steak, the cost will be 0.5 servings of trout.
Opportunity costs are assessed not only in monetary or substantive terms, but also in terms of anything that is significant. For example, a person who wishes to watch each of two television programs broadcast simultaneously and is unable to record one of them, and therefore can only watch one of the desired programs. Of course, if a person records one program while watching another, the opportunity cost is the time the person spends watching the first program rather than the second. In a store situation, the customer's opportunity cost of ordering both meals could be twofold -- the extra $40 to buy the second meal, and his reputation as he might be thought of as being wealthy enough to spend that much on I'm going. Another option. The family might decide to use a short vacation period to visit Disneyland instead of making home improvements. The opportunity cost here is covered by having happier children, so a bath remodel will have to wait for another day.
Consideration of opportunity costs is one of the main differences between the concept of economic value and accounting cost. Estimating opportunity costs is fundamental to assessing the true cost of any course of action.
I note that opportunity costs are not the sum of available alternatives if these alternatives are, in turn, mutually exclusive.
Opportunity costs are sometimes difficult to imagine as a certain number of rubles or dollars. In the context of a widely and dynamically changing economic situation hard to choose The best way use of the available resource. In a market economy, this is done by the entrepreneur himself as the organizer of production. Based on his experience and intuition, he determines the effect of a particular direction of application of the resource. At the same time, income from lost opportunities (and therefore the size of opportunity costs) is always hypothetical.
The accounting concept completely ignores the time factor. It estimates costs based on the results of already completed transactions.
And when determining opportunity costs, it is important to understand that the effect of any option for using a resource can manifest itself in different periods. The choice of an alternative is often associated with the answer to the question of what to prefer: quick profit at the cost of future losses or current losses for the sake of profit in the future? On the one hand, this makes it difficult to estimate costs. On the other hand, the complexity of the analysis results in the advantage of a more thorough consideration of all aspects of the future project.
The concept of opportunity cost is a powerful tool in making effective economic decisions. The assessment of resource costs is carried out here on the basis of comparison with the best of the competitors, the most effective method use of rare resources. The centrally managed system deprived economic entities of independence in making strategic decisions. This means the possibility of choosing better alternatives. Themselves central authorities even with the help of computers were unable to calculate optimal structure production for the country. They could not find answers to the two main questions of economics: “what to produce?” and “how to produce?”. Therefore, under these conditions, the result of opportunity costs was often commodity shortages and low-quality products.
For a market economy, choice and alternativeness are integral features. Resources must be used optimally, then they will bring maximum profit. The saturation of goods and services that consumers need is a sustainable result of the opportunity costs of the market system.
Workshop
Let's assume you have 800 rubles. If you decide to spend these 800 rubles. for a football ticket, what is your opportunity cost of going to the football match?
Opportunity costs, opportunity costs or opportunity costs is a term that denotes lost benefits (in a particular case, profit, income) as a result of choosing one of the alternative options for using resources and, thereby, refusing other opportunities. The amount of lost profit is determined by the utility of the most valuable of the discarded alternatives. So in order to know the value of opportunity costs, you need to know the possible uses of these 800 rubles. For example, this amount could be spent on clothes costing 800 rubles, or on products whose total cost is also 800 rubles, etc. In this situation, we are faced with a choice and decided to spend 800 rubles. for a football ticket. The cost of goods purchased is the opportunity cost, equal to the cost of the services that we sacrifice in order to choose other services. Opportunity costs in in this example- this is the cost of goods and services that we gave up in order to purchase a football ticket.
So in order to know the value of opportunity costs, you need to know the possible uses of these 800 rubles. Let’s say there was an opportunity to buy a product with this money and sell it at a 50% markup. In this case, the value of opportunity costs will be equal to 1200 rubles. income.
Production costs are usually understood as a group of expenses, monetary expenditures necessary to create a product. That is, for enterprises (firms, companies), they act as payment for purchased production factors. Such expenses cover the payment for materials necessary to provide production process(raw materials, electricity, fuel), employees, depreciation, and expenses to ensure production management. When goods are sold, entrepreneurs receive revenue. Some of the received financial resources goes to compensate for production costs (to produce the required quantity of goods), the second part is to ensure profit, main goal, for the sake of which any production begins. This means that production will be less than the cost of goods per volume of profit.
What is opportunity cost?
Most of the costs of production come from the use of resources that support this very production. When resources are used in one place, they cannot be used elsewhere because they are rare and limited. For example, the money that was spent to buy a blast furnace to produce pig iron cannot be used to produce soda. Result: if any resource is decided to be used in a certain way, then it cannot be spent in another way.
Taking into account precisely this circumstance, whenever a decision is made to start production, there is a need to refuse to use a certain amount of resources in order to use this same resource in the manufacture of other products. Thus, opportunity costs are created.
Opportunity cost, opportunity cost, or opportunity cost (English: Opportunity cost(s)) is an economic term denoting lost benefit (in a particular case, profit, income) as a result of choosing one of the alternative options for using resources and, thereby, refusing other possibilities. The value of lost profits is determined by the utility of the most valuable of the discarded alternatives. Opportunity costs are an integral part of any decision making.
Opportunity costs are not expenses in the accounting sense, they are just an economic construct for accounting for lost alternatives.
If there are two investment options, A and B, and the options are mutually exclusive, then when assessing the profitability of option A, it is necessary to take into account the lost income from not accepting option B as the cost of a lost opportunity, and vice versa.
Opportunity "explicit" and "implicit" costs
Most production costs is the use of production resources. If the latter are used in one place, they cannot be used in another, since they have such properties as rarity and limitation. For example, money spent on buying a blast furnace to make iron cannot be spent on producing ice cream at the same time. As a result, by using a resource in a certain way, we lose the opportunity to use this resource in some other way.
Due to this circumstance, any decision to produce something necessitates the refusal to use the same resources for the production of some other types of products. Thus, costs represent opportunity costs.
Opportunity costs are the costs of producing a good, assessed in terms of the lost opportunity to use the same resources for other purposes.
Opportunity Cost Curve
In conditions of limited resources, it is impossible to increase the consumption of one good without reducing the consumption of another good. Suppose: goods X and Y are produced in society.
The production of additional units of product X can be achieved by using a certain set of factors of production. But due to limited resources, this number of factors will not be used to produce goods Y. Everything that society could have received, but due to limited resources, did not receive and missed this opportunity is the cost of lost opportunity. If three units of Y must be given up to produce X, then these three units not produced determine the opportunity cost of producing a unit of X.
The value of lost opportunity costs (opportunity costs) is the monetary proceeds from the most profitable of all alternative uses of resources.
Limited resources give rise to the fundamental economic problem of choice: what goods and services a society should produce with limited amounts of land, labor and capital.
RATIONAL CHOICE
is a choice that is made based on a comparison of the benefits and opportunity costs of any decision. In this case, those actions are selected that are most economically beneficial - i.e. bring the greatest benefits compared to costs
MARGINAL COST
- additional costs for applying additional effort (or producing an additional unit of output, if this unit can be measured quantitatively).
MARGINAL BENEFITS
- additional benefit from applying additional effort (or profit from selling an additional unit of product).
A visual representation of the problem of limited resources and the need for choice is provided by the production possibilities curve.
The principle of comparative advantage means that even in the absence of absolute advantages (lower absolute production costs for all goods), a country can profitably and effectively participate in world trade. To do this, it is necessary to have relatively, that is, comparatively lower costs for some goods. Then the country will have a comparative advantage in these goods. Specialization based on the principle of comparative advantage contributes to more efficient allocation and use of resources, improving the level and quality of life of the population, and ultimately dynamic economic growth.
The history of the appearance of the concept in Russian economic vocabulary is connected with the work of the great English economist David Ricardo and with the translation of English comparative advantages into Russian.
Comparative from Latin compare- connect, associate, which follows from com- (together) + par equal, identical; identical. In the primary sense, a more accurate translation of English compare- to put on an equal footing, to compare, to compare, to distinguish. This etymological excursion allows us to more accurately determine the relationship between the concepts of comparative advantage and competitive advantage, as well as the content of the conclusion that comparative advantage is the basis competitive advantages(see competition).
The principle of comparative advantage as a basis international trade
It is obvious that international trade develops because it brings benefits to the countries participating in it. What lies behind this gain from international trade? The main prerequisite for the emergence of any market is the division of labor. This is also true for the global market. As explained above, in the case of the world market and international trade we're talking about about the international division of labor, entailing international cooperation of labor, i.e. intercountry exchange material benefits. The international exchange of goods and services, which is based on MRI, is mutually beneficial for all countries participating in the world market. International trade is a means by which countries, by developing specialization, can increase the productivity of existing resources and thus increase the volume of goods and services produced and increase the level of welfare. The above thesis also has a theoretical justification - the principle of comparative advantage, which was formulated by David Ricardo.
The theory of comparative advantage operates on the concept of opportunity cost. Alternative price - work time, required to produce a unit of one good, expressed in terms of the labor time required to produce a unit of another good. In our example, the alternative price of goods 1 (opportunity costs) will be A1/A2 for country I, and A1/A2 for country II, where A1 and A2 are the time required to produce goods 1 and 2 in 1, respectively. th country. Indicators with “strokes” will reflect the situation in country II.
So, the theory of comparative advantage - if countries specialize in the production of those goods that they can produce at a relatively lower cost than other countries, then trade will be mutually beneficial for both countries, regardless of whether production in one of them is absolutely more more effective than the other.
For your information. If it turned out that A1< A1", а А2" < А2, то можно было бы констатировать, что страна 1 имеет абсолютное преимущество в производстве товара I, поскольку на производство этого товара в стране I затрачивается меньше времени, чем в стране II, а страна II по аналогичным причинам имеет абсолютное преимущество в производстве товара 2.
If A1/A2< А1"/А2", это означает, что затраты на производство товара I, выраженные через затраты на производство товара 2 в стране I ниже, чем аналогичный показатель для страны II. Следовательно» 1st country will export product I to country II, while country II will sell product 2 on the world market.
Let's consider the situation with comparative advantages using the example of two countries, England and Portugal, and two goods - cloth and wine. Information on the production of these goods in the closed economies of England and Portugal is presented in columns 2-4 of the table.
Time to produce a unit of cloth and a unit of wine in England and Portugal
At first glance, international trade for England is beneficial from all points of view, since the absolute advantage in the production of both goods 1 and goods 2 here belongs to Portugal, i.e. 40< 60, и 45 < 50. Для Португалии ситуация выглядит сложнее. Португалия обладает абсолютным преимуществом и в производстве вина и в производстве сукна - (A1 < А1"), (А2 < А2"), однако A1/A2 < A1"/A2" (40/45 < 60/50). Это означает, что относительное (сравнительное) преимущество в производстве вина принадлежит Португалии, а относительное преимущество в производстве сукна - Англии, т. е. для Португалии имеет смысл специализироваться в производстве вина, а для Англии - сукна, поскольку А2"/A1" < A2/A1 (50/60 < 45/40), что в конечном итоге обеспечит выгоду для обеих стран. Если Португалия откажется от производства сукна и увеличит объем производства вина до двух единиц (причем 2-ю единицу вина она будет обменивать на 1 единицу сукна, на производстве которого специализируется Англия, отказавшаяся от производства вина), то затраты Португалии сократятся с 85 до 80 часов (2 х 40), а Англии - с 110 до 100 часов (2 х 50). Общие же затраты на производство данного объема продукции сократятся на 15 часов (195-180).
Such an exchange is beneficial for both countries, since the countries’ needs for both wine and cloth will be satisfied at the same level, but labor costs for producing a given volume of products will be reduced. The theory of comparative advantage is valid for any number of countries and any number of goods. It is still, despite clarifications and additions and other theories of international trade, the prevailing concept, clearly proving the existence of gains from world trade for all countries participating in it.
Production possibility curve(transformation curve) ( Production possibility curve) is a set of points that show various combinations of maximum production volumes of several (usually two) goods or services that can be created under conditions of full employment and the use of all resources available in the economy.
The production possibilities curve reflects at each point the maximum volume of production of two products with different combinations of them, which allow the full use of resources. Moving from one alternative to another, the economy switches its resources from one product to another.
A term denoting lost profits (in a particular case, profit, income) as a result of choosing one of the alternative options for using resources and, thereby, refusing other opportunities. The value of lost profits is determined by the utility of the most valuable of the discarded alternatives. Opportunity costs are an integral part of any decision making. The term was introduced by the Austrian economist Friedrich von Wieser in his monograph “Theory public economy"in 1914.
The theory of opportunity costs is described in the monograph “The Theory of Social Economy” of 1914. According to it:
The contribution of von Wieser's opportunity cost theory to economics is that it is the first description of the principles of efficient production.
Opportunity costs are not expenses in the accounting sense, they are just an economic construct for accounting for lost alternatives.
Example
If there are two investment options, A and B, and the options are mutually exclusive, then when assessing the profitability of option A, it is necessary to take into account the lost income from not accepting option B as the cost of a lost opportunity, and vice versa.
A simple example is given by the famous joke about a tailor who dreamed of becoming a king and at the same time “would be a little richer because he would sew a little more.” However, since being a king and a tailor simultaneously impossible, then the income from the tailoring business will be lost. This should be considered lost profits upon accession to the throne. If you remain a tailor, then the income from the royal position will be lost, which will happen opportunity costs given choice.
Notes
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The concept of opportunity cost or opportunity cost is that making any financial decision in most cases involves giving up some alternative option. In this case, the decision is made as a result of comparing not direct, but alternative costs.
Imputed (opportunity) costs- losses resulting from the fact that alternative options that are closest in effectiveness to the option under consideration were not used. Opportunity cost, also called opportunity cost or opportunity cost, is the amount of churn Money that will occur as a result of the decision, including the income that the company could have received if it had chosen a different option for using its existing resources. Lost profits are a loss and must be taken into account when assessing financial transactions.
In economic theory, opportunity cost refers to the cost of other products that must be abandoned or sacrificed in order to obtain a certain amount of a given product.
For example, if production space is allocated for an investment project, which can be sold as an alternative course of action, then the profit (net of taxes) that the enterprise could receive in case of sale, when assessing the efficiency investment project must be included as opportunity costs in investment costs.
To formalize decisions taking into account opportunity costs, you can use the flowchart proposed by the English scientist B. Ryan (Fig. 2.1).
Opportunity costs can be external and internal. The sum of the internal and external opportunity costs of any transaction is the gross opportunity cost. If making a financial decision requires purchasing materials or hiring new employees, i.e. direct cash costs, talk about external opportunity costs. If it is planned to use an internal resource that is already available at the enterprise and paid for earlier, regardless of the decision made, then we talk about internal opportunity costs. For example, when deciding on the advisability of investing free cash in any assets, lost profits are taken into account as internal opportunity costs, as lost income from their alternative use, for example, when crediting funds to a deposit.
Rice. 2.1 Flowchart for calculating opportunity costs, by the English scientist B. Ryan.
The following rules can be distinguished practical application this concept:
1. When making financial decisions, the manager must take into account all possible alternative options for using assets and choose the one in which the excess of possible income over opportunity costs is maximum.
2. In the absence of other alternatives, any solutions that allow at least a minimal increase in capital must be implemented.
3. When making decisions taking into account opportunity costs, cash inflows and outflows that occurred in the past are not taken into account, since they can no longer be avoided. In this regard, the costs of previously acquired assets at the disposal of the enterprise are not taken into account as alternative costs, including depreciation of fixed assets and intangible assets, the acquisition of which is not the result of the implementation of this decision.
4. Projects that provide cash inflows whose present value exceeds the associated opportunity costs increase the value of the enterprise, that is, they make the owners of the enterprise richer.
