I always drive to work on my car which takes me around 90 minutes. As my car broke down one day, I decided to take the subway to work. It took me just 40 minutes to reach my work desk! Which way of travel is beneficial for me? It depends as I got to know while going through lessons in opportunity cost and profit maximization homework.
Opportunity cost and profit maximization
Opportunity cost is the gains or profit you give up in order to take another action. In the above example of my commuting to work, when I use the car I lose 50 minutes of my time in traffic and the chance to interact with people. That is the opportunity cost involved.Other way round, traveling on the subway rushes, the cool amenities of my car cabin and personal space are the opportunity costs for not taking the car to office.
Profit maximization is the single most important goal of any business or person. It involves adjusting factors like production cost, sale prices or output levels of a business. One can maximize profit by reducing opportunity costs.
You can read about use of opportunity cost in profit maximization from various sources like opportunity cost and profit maximization homework.
Uses and examples
In any business, people look out for options that yield the best returns. Especially investment decisions involve a meticulous choosing of projects and portfolios for spending. One missed opportunity can cost you millions of dollars. Businesses have therefore made it a point to calculate opportunity cost or the expected value of returns from an investment.
Usually, opportunity cost is measured in terms of money. But it can also be expressed in terms of time, man-hours, mechanical output and amount of goods of services as the scenario suits. Any tangible entity that we have to part with due to certain decisions can be termed opportunity cost.
I frequently follow the expertsâ€™ forums on opportunity cost as in the opportunity cost and profit homework to replicate the concepts in daily life.These concepts not only help businesses and firms in their investment decisions but can also be used in day to day decisions â€“ which involve our attention.
Take the following instances for consideration.
- A business firm has the option to invest a certain amount of funds between a potentially lucrative security bond and purchasing new equipment for a new branch of operation. The returns of both options are calculated Now, if the firm considers investing in the security bond, the opportunity cost is the returns that the new equipment would have generated.
Vice versa, the buying of new equipment also involves the opportunity cost of the returns that would have yielded by the security bond along with the possible losses from the bond.
- You buy a ticket for a rock concert that cost you $200. At the same time, you have an assignment to work on that needs to be submitted the next few hours. Going to the concert would involve the opportunity cost of quality time to read and research for the ensuing assignment. Add to it the fatigue and extra costs of traveling to the concert.
Other way round, if you decide to skip the concert and study, the opportunity cost is the 200 bucks that you already spent and the possible enjoyment you would have attained at the concert. For getting to the core of these issues, you can surely consult opportunity cost and profit maximization homework.
- A person decides to take leave from work and spend time with his kids. Opportunity cost involved for the person is the dayâ€™s wages and the important interaction with clients and colleagues for future prospects and projects. You also miss on any work related developments.
Declining the leave and going to work, would have cost the person the pleasure of playing with the kids and spend quality time.
- The government has the choice to invest certain funds on a highway project or a student exchange program. The highway project would have compromised on the student exchange program and dealt a blow to students and academics. A possible international collaboration in academics would have been left out. Vote share from the student community would also be reduced in the next elections for the government.
If the government decides to forgo the highway project at the expense of the student program, opportunity cost involved is the lost connectivity between cities.Workers would have been employed in the project. Even here the government would lose vote shares from workers and profit-minded citizens.
Real life scenarios indicate the use of opportunity cost concept in some way or the other. Whenever there is an option to maximize oneâ€™s profit by deciding on where to invest money or time, one need to calculate every possible opportunity cost in order to reduce losses on missed opportunities. With opportunity cost and profit maximization homework you will get a better idea of its functioning and best results.
Government policies and actions are also highly influence by opportunity cost and profit maximization decisions.
Profit maximization is also accompanied in economies by wealth maximization. The tool usually aims at rearranging the following factors
- Production cost
- Sale prices
- Output levels
Profit maximization is defined as the difference between total revenue and the total opportunity cost. It naturally comes to mind that production cost needs to be deducted from total revenue to obtain profit figures, but real life calculation needs to account for opportunity costs as the missed chances also add an impact on your profits.
Opportunity cost and profit maximization homework employ different real time examples to simulate the concepts and give a better understanding of these macroeconomic tools.