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Benefits of the
OPPORTUNITY COST
to individual decision making
Presentation by Group 3
TNETNOC FO ELBAT
I. OPPORTUNITY COST
Definition
Formula & Calculation of Opportunity cost

II. OPPORTUNITY COST IN DECISION - MAKING

Relationship
Benefits of the opportunity cost approach
to individual decision making
OPPORTUNITY COST
Choosing one option Missed out Value
over another

A B B
 FORMULA AND CALCULATION
OF OPPORTUNITY COST

Opportunity Cost=FO−CO

In which,
FO=Return on option not chosen (foregone option)
CO=Return on option chosen
THE PRODUCTION POSSIBILITY FRONTIER
(PPF)

PPF

Opportunity cost
determine comparative advantage

Trade-off
THE PRODUCTION POSSIBILITY FRONTIER
(PPF)
EXAMPLE

3 hours at the cinema

before an exam

Opportunity cost ?
 Higher degree

(100 milions/ 2 years)

8 milions/ month 20 milions/ month

OPPORTUNITY COST
IN DECISION MAKING
RELATIONSHIP
Decision-making process involves opportunity cost

Opportunity cost & Decision making are intergal

opportunity cost
 BENEFITS
of opportunity cost approach to individual decision making

Rational Resource Allocation

Risk Management Long-term Planning

Quality Personal Growth

Maximising Utility Goal achievement

ENCOURAGES RATIONAL DECISION MAKING

Considering the trade-offs

more rational & informed

encourages to make
decision

Weigh props & cons

1
RISK MANGEMENT more popular

No risk Desired risk

Some alternatives can be risky

Opportunity cost risks associated with decisions Risk-aware choices

Think carefully
IMPROVE QUALITY Less impulsive

2-3
 MAXIMISING UTILITY
want-satisfying power
of a good or service

From buyer’s perspective what to sacrifice at the margin

Alternatives one providing least opportunity cost

4
RESOURCES ALLOCATION & MANGEMENT

Effectively & efficiently

allocating resources
to chosen option

BETTER MANAGEMENT

5
 LONG-TERM PLANNING
Consider both immediate benefits & future opporutinties

University >> Working

Trade-off Future opportunities

tuition fee good job

6 working income high salaries

promotion
 PERSONAL GROWTH

Deeper understanding of yourself SELF-AWARENESS

priorites?
strengths

goals?
weaknesses

7 WHAT DO YOU WANT?

 GOAL ACHIEVEMENT

goals
Align choices with
priorities

Long-term o b j e c t i v e s

long-term objective: freedom + own capital

which option?
8
 CONCLUSION

Effective Efficient
O R T U N I T Y C O S T
O P P
o u t v a l u e IN DECISION MAKING
missed e r B
c h o o s i n g A o v
when

Growth Goals
THANK YOU FOR LISTENING!
 Q&A TIME
REACH OUT FOR ANY QUESTIONS!
IT'S
GAME
TIME!
OUR ANSWERS