What Is a Low Opportunity Cost? Overview, 6 Facts About It

A low opportunity cost is defined as the return from investing in an asset that has little or no return.

This concept is applicable to many different types of investments, but is especially important in real estate.

In this post we will define what exactly a low opportunity cost is, and look at some of the different ways it can be applied.

What Is a Low Opportunity Cost?

Opportunity costs often refer to the amount of expense incurred while making a certain economic decision. Chance costs may be quite large, suggesting that a substantial quantity of resources must be sacrificed in order to take advantage of a particular opportunity.

What Is a Low Opportunity Cost? 

With a low opportunity cost, the individual must sacrifice or forego very few resources in order to take advantage of an opportunity.

It is crucial to highlight that determining whether an opportunity has a low or high opportunity cost needs a comprehensive examination of the individual’s condition and the chances or resources that must be sacrificed in order to pursue a particular opportunity.

What Constitutes Low Opportunity Cost?

One of the simplest ways to comprehend what constitutes a low opportunity cost is to consider a person who might work as a grocery store stock clerk.

If the individual lacks training for skilled labor and has no other career prospects, accepting this opportunity does not necessitate forgoing other, more lucrative employment opportunities.

This would represent a low opportunity cost, indicating that the individual can enjoy the benefits of the new position without losing much.

Conversely, there is more to lose if the person who is offered the stock position at the supermarket has a degree and is actively seeking a career linked to that degree.

This is especially true if the work schedule at the supermarket prevents the employee from aggressively pursuing higher-paying opportunities that are better suited to his or her abilities.

In this case, the opportunity cost is substantial, since the individual must forego future possibilities in order to acquire a higher-paying position that might ultimately lead to a career.

Low opportunity cost In Business

Almost every form of financial action can be associated with a low opportunity cost. Investors can compare the advantages and disadvantages of investing in one security vs another depending on the sacrifices that must be made in order to get the desired returns from the chosen asset.

What Is a Low Opportunity Cost? 

If the selected security has a high level of risk, the investor is likely incurring substantial opportunity costs, since he or she might have regularly generated profits by investing in assets with less volatility.

Similarly, an investor who chooses more conservative investments is likely to incur a modest opportunity cost, given that the effort entails less risk and is expected to provide fairly constant returns so long as the assets are retained.

Opportunity Cost can Impact Decisions

Opportunity cost analysis can influence a wide range of decisions. Choosing to attend college rather than entering the workforce immediately necessitates forgoing current income in expectation of earning more after graduation.

Even something as basic as choosing which veggies to cultivate in a garden requires considering the advantages and disadvantages of each option, particularly in light of the anticipated outcome of the endeavor.

Since so many variables may influence decisions, it is typically up to the person to evaluate whether a particular option has a low or a high opportunity cost.

Types of opportunity costs

Explicit costs

Explicit costs are the direct costs of an action (business operational costs or expenses), incurred by a financial transaction or the actual transfer of resources. In other words, explicit opportunity costs are the firm’s readily identified out-of-pocket expenses.

This implies that explicit expenses will always have a monetary value and require a monetary transfer, such as the payment of staff.

What Is a Low Opportunity Cost? 

In light of this, these costs are easily identifiable under the expenses section of a company’s income statement and balance sheet, where they represent all cash outflows.

The following are examples:

Costs associated with land and infrastructure
Wages, rent, and supplies are examples of operation and maintenance expenses

The following are scenarios:

If a person quits work for an hour and spends $200 on office supplies, then the individual’s explicit costs are equivalent to the overall office supply expenses of $200.

In the event that a firm’s printer malfunctions, the explicit expenses for the company equal the whole sum due to the repair professional.

Implicit costs

Implicit costs (also known as implied, imputed, and notional costs) are the opportunity costs of utilizing firm-owned resources that could have been employed for other reasons.

These expenditures are frequently concealed and unrevealed to the public. Implicit opportunity costs, as opposed to explicit costs, correspond to intangibles.

As a result, they cannot be identified, characterized, or reported with precision. This indicates that they are costs that have already occurred within a project without the exchange of currency.

What Is a Low Opportunity Cost? 

This might involve a small business owner not taking a salary in the early stages of their stay in order to increase the profitability of the firm.

As implicit costs are the outcome of assets, they are not reported for accounting reasons, as they do not reflect any monetary losses or profits.

In terms of production variables, implicit opportunity costs permit the depreciation of commodities, materials, and equipment necessary for a business’s activities.

Primarily the resources given by a business owner are examples of production’s hidden costs.

Time Human effort Infrastructure

The following situations exist:

If a person quits work for an hour to spend $200 on office supplies and earns $25 per hour, then the individual’s implicit costs are equal to the $25 that he or she might have earned instead.

If a company’s printer malfunctions, the implicit cost is equivalent to the whole amount of production time that might have been employed had the equipment not broken down.

Excluded from opportunity cost

Sunk costs

Sunk expenses are costs that have already been incurred and cannot be recouped. Since sunk costs have already been incurred, they should not affect present or future actions or choices about benefits and costs.

Those who recognize the insignificance of sunk costs realize that “consequences of decisions cannot affect choice itself.”

From the perspective of cost traceability, sunk costs may be direct or indirect. If the sunk cost can be broken down into a single component, it is a direct cost; if it is caused by several goods or departments, it is indirect.

What Is a Low Opportunity Cost? 

Based on the composition of the expenses, sunk costs may be either fixed or variable.

When a corporation abandons a particular component or ceases manufacturing a certain product, the sunk cost often comprises fixed expenditures such as rent for equipment and employees, as well as variable costs resulting from changes in time or materials.

Typically, fixed expenses are more likely to represent sunk expenses.

In general, an asset’s sunk cost will be lower the greater its liquidity, adaptability, and compatibility.

Given below is a scenario:

A corporation spent $5,000 on marketing and advertising their music streaming service in an effort to enhance its visibility to its target demographic and potential customers. Ultimately, the campaign was unsuccessful.

The marketing and advertising expenditures of $5,000 represent the company’s sunk costs. This expenditure is should be disregarded by the corporation when making future decisions, as it demonstrates that no new investments should be made.

In spite of the reality that sunk costs should be disregarded when making future decisions, people occasionally make the mistaken assumption that sunk costs are relevant. That is the sunk cost fallacy.

Example:Steven paid $100 for a video game, but when he began to play it, he discovered that it was uninteresting rather than engaging. However, Steven believes he purchased the game for $100, therefore he must complete it.

$100 in addition to the expense of time spent playing the game. Steven invested $100 with the hope of completing the entire game.

Despite the fact that the game is a form of entertainment, he experienced no enjoyment while playing. Therefore, it increases costs.

Marginal cost

The marginal cost notion in economics refers to the additional cost of each new product produced over the whole product line. For instance, if you construct one airplane, it will cost you a great deal of money, but if you construct one hundred airplanes, the price per unit will be far cheaper.

When constructing a new airplane, the materials used may be more valuable; thus, to enhance the profit margin, produce as many aircraft from as few resources as feasible. MC or MPC represents marginal cost.

What Is a Low Opportunity Cost? 

Marginal cost: The increase in cost caused by an additional unit of production is called marginal cost.

By definition, marginal cost is equal to change in total cost (TC) (△TC) divided by the corresponding change in output (△Q) : Change in total cost/change in output: MC(Q)=△TC(Q)/△Q or MC(Q)=lim=△TC(Q)/△Q=dTC/dQ(△Q→0) (as shown in Figure 1)

Theoretically, marginal costs describe the increase in total costs (consisting of both fixed and variable costs) caused by a one-unit increase in production.

Conclusion

A low opportunity cost is an opportunity cost that isn’t worth it. For example, if you sell a product or service for $500 and a competitor sells it for $500 then the price difference doesn’t matter. This is because your competitor has the same amount of profit as you do.

A low opportunity cost is different than a high opportunity cost. A high opportunity cost means you could have made more money if you sold your product or service for a higher price.

FAQ

A lower opportunity cost creates a comparative advantage in production. A comparative advantage in one good implies a comparative disadvantage in another. It is not possible to have a comparative disadvantage in all goods. An absolute advantage means the ability to produce more of all goods.
Assuming your other options were less expensive, the value of what it would have cost to rent elsewhere is your opportunity cost. Sometimes the opportunity cost is high, such as if you gave up the chance to locate in a terrific corner store that was renting for just $2,000/month.
The formula for calculating an opportunity cost is simply the difference between the expected returns of each option.
A student spends three hours and $20 at the movies the night before an exam. The opportunity cost is time spent studying and that money to spend on something else. A farmer chooses to plant wheat; the opportunity cost is planting a different crop, or an alternate use of the resources (land and farm equipment).
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Pat Moriarty
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