Opportunity costs

What are opportunity costs?

the cost of missing out on the next best alternative when making a decision

what is an example of an opportunity cost?

the opportunity cost of starting a new business will be the loss of income from their current career

what are examples of opportunity costs in the economy?

work leisure choices
government spending priorities
starting a business
use of scarce farming land

What is the importance of opportunity costs?

every business decision will result in an opportunity costs, some of which will be very high
no businesses have unlimited resources, therefore choices have to be made

How can opportunity costs be measured?

time and money

What are the main opportunity costs for small businesses?

do not purchase too much stock, as this ties up cash
take care when spending cash, cash flow is always a difficult issue to start-ups

What are the factors that need to be considered when deciding between opportunities?

estimating potential sales
time
fiance available
skills of the workforce

How can estimating potential sales affect the decision between opportunities?

it is very difficult to do
businesses will need accurate market research and relevant experience in the industry they are working in

How can finance available affect the decision between opportunities?

as cash flow is the biggest cause of failure for small businesses
businesses will need to keep costs down and be able to grow the business at a steady and sustainable rate

How can time affect the decision between opportunities?

businesses need to decide whether the market decisions are good and is the economy currently in a position that will benefit them and whether the current trends fit their business ideas

How can skills of the workforce affect the decision between opportunities?

businesses need to decide whether they have the correct professional qualifications, determination and drive, motivation and the ability to take risks

Why is opportunity cost involved in every business decision?

because every decision commits resources that can then not be used for other things

Why might an increase in interest rates be relevant to opportunity cost?

the higher the interest rate the higher the opportunity cost of that withdrawal