1.5.5 Business Choices

Opportunity cost

Opportunity cost is the loss of the next best alternative when making a decision

Explain product as a trade off

Choosing to spend money upgrading an existing product may result in the loss of the next best alternative, which could be research and development on a new product.

Explain customer sales as a trade off

• A firm selling organic avocados is offered a supply contract by a supermarket that wants to buy all of their stock each month, but at a low price

• The supermarket is a prestigious customer

• The firm decides not to accept the contract, as the opportunity cost (loss of a prestigious customer) is worth less than the lost revenue to existing customers

Explain market research as a trade off

• Foregoing market research may help the business to get its product to market quicker

• However, the trade-off is that the product may not have the features/qualities desired by the market

Explain business ownership as a trade off

• Choosing to operate as a partnership will mean that a business loses the benefits of pirating as a private limited company

Explain promotional methods as a trade off

• Businesses have a limited amount of money to spend on promoting their products

• Choosing to sponsor an elite athlete means that the business’s may have to give up other forms of promotion, such as radio advertising

Explain pricing strategy as a trade off

• If a business decides to use a competitive pricing strategy, it loses the opportunity to price-skim