theme 1 - 1.5.5

what is a opportunity cost

is the value of the next best alternative forgone when making a decision . it arises becasue resources ( lab out , capital , land ) are scarce , while wants are unlimited .

• B may decide how to allocate scars resources most effectivly - but every chioce has a hidden cost in terms what was given up

Opportunity cost examples

• a consumer buying a new phone cannot buy jeans → jeans are the opportunity cost

• a b investing in electric vehicles may not produce petrol vehicles → petrol cars are opportunity cost

why does opportunity cost matter in a business

• it helps the manager evaluate weather the benefits of 1 decision outweighs the loss of a alternative

• encourages rational DM , efficient resource allocation and consideration of explicitly cost ( money spend ) and implicit cost ( benefits sacrificed )

What is a trade off

occures when choosing more of one thing inevitably means having less of another , which is essentially a compromise becasue reassurances are finite .

• unlike opportunity cost which focuses o a singe best forgone option , trade offs consider the balance between competing priorities

what are examples of trade off

• A factory can produce either cars or vans → increasing car output means reducing van production

• A start up may reduce marketing spend to buy new machinery → sacrificing promotion for efficiency

application of trade offs in a b decision - sales/ price strategy

• if a supplier ejects a supermarket contract ( lower price , high prestige ) → trade off is lost revenue , but they maintain loyalty of existing customers . highlighting how firms weigh revenue maximisation against brand positioning

• Choosing comeptive pricing → boost SV , but losses opportunity cost to skim prices and extract minimum consumer surplus

Application of trade offs in B decision - p development / market Reaserch

• spending money upgrading an existing p → trade off is lost opportunity for R+D of new p . → ST gain

• allows you to be faster in market but risks misalignment with consumer wants . trade of between speed + accuracy

The link between opptunity cost + trade offs

every trade of implies an opportunity cost

• sponsoring an athlete → opportunity cost is the next best promotional method forgone

• this forces b to think LT about resource allocation + what they might lost , while trade of focuses on immediate compromise