Calculation of opportunity costs per unit

Opportunity costs

Definition: what are opportunity costs?

As Opportunity costs (partly also Alternative costs are referred to as lost profits or a loss of benefit when a resource is not used for a specific purpose.

A resource cannot be used more than once, but only for a specific purpose. When capital is invested in real estate, it cannot be used to buy stocks at the same time. Therefore one of many alternatives has to be chosen. Opportunity costs are the lost income from unused alternatives.

Example:

Money is in a checking account and earns interest at 2%. However, an investment in the financial market would have brought a 10% return. The difference is the opportunity cost. Sample calculation:

Opportunity cost formula = (x * 1.1) - (x * 1.02)

With an investment of x = € 1,000 the investor would have earned € 80 more on the capital market. The 80 € represent opportunity costs. This example already makes it clear why opportunity costs do not represent real costs according to the business administration definition. The investor waives € 80, but there is no loss of value.

2nd example:

A company owns an office building. This building is used by the company itself. But it would be possible to rent out the building. However, since the building itself is used, there is no possibility of generating rental income. This lost revenue is known as opportunity cost.

Both examples make it clear why opportunity costs too Alternative costs to be named. Both in business administration and in everyday life there are usually several alternatives available when making a decision. Each alternative has advantages (in relation to example 2: either using the building yourself or generating rental income) and “costs”.

Note: opportunity costs are not real costs

Despite their name, opportunity costs are not real costs and are not taken into account in business cost / performance accounting.

Subject areas:

Business administration, economics

Further reading:

  • Stiglitz J., Walsh, C. (2014): Microeconomics: Volume 1 on Economics, Volume 1, 4th Edition, pp. 194 ff.

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Tags: Definition of costs Opportunity costs

Item name: Opportunity costs