You have won a free ticket to Cold Play concert. Beyoncé concert is on the same day and the ticket cost is $150. However, you were willing pay $200 to go see Beyoncé. If you chose to go to Cold Play concert, what is your Opportunity Cost?
Opportunity Cost is a fundamental concept in Microeconomics, however, often not everybody grasps the concept clearly when it comes to decision-making in real-world. For instance, I put forward the question above to quite a few of my connections on social networks including my poker group. I got only one positive response from a smart high-school student.
Well, the correct choice is $5o (#4 option). Wondering why?
Opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, it is the “cost” incurred by not enjoying the benefit that would have been had by taking the second best available choice.
In our case, assuming the best choice was going to Cold Play concert, the “cost” incurred by not enjoying the Beyonce concert was $50, since we were willing to pay $200, but the tickets for Beyonce concert were available for $150. In more colloquial terms, Opportunity Cost is value of what you sacrifice by not going to Beyonce concert.
Now apply this concept to a complex business issue.