What Is the Opportunity Cost of Capital?

Opportunity cost refers to the opportunity for an enterprise to abandon another business activity in order to engage in a certain business activity, or another type of income that is abandoned when certain resources are used to obtain a certain income. The income or another income that should be obtained from another business activity is the opportunity cost of the business activity that is being performed. Through the analysis of opportunity cost, the company is required to correctly select the operating item in its operation based on the fact that the actual benefit must be greater than the opportunity cost, so that limited resources can be optimally allocated. ^[1]

opportunity cost

Opportunities are optional items

Opportunity cost means the opportunity must be an item that the decision maker can choose. If it is not an item that the decision maker can choose, it is not an opportunity for the decision maker. For example, a farmer can only raise pigs and chickens, so raising cattle will not be an opportunity for a farmer.

Opportunity cost is profitable

The project with the highest yield among the abandoned opportunities is the opportunity cost, that is, the opportunity cost is not the sum of the benefits of the abandoned projects. For example, a farmer can only choose one of pig raising, chicken raising, and cattle raising. If the income relationship between the three is cattle raising> pig raising> chicken raising, the opportunity costs of pig raising and chicken raising are both cow raising, and The opportunity cost of raising cattle is only for pigs.

Opportunity cost and scarcity of resources

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The law of increasing opportunity cost means:

First of all, from the interest rate, the funds of the leasing company come from the bank, so

Opportunity cost vs.

The use of the concept of opportunity cost can more accurately reflect the use of limited resources for a certain project from a social point of view.

The following example is used as a calculation example:

Produced by the enterprise

Case information

Document 1. A company is going to change its restaurant to

American accounting scholar Robert P. Magee defines accounting as "accounting is the activity of collecting, processing, processing, and reporting on information that affects the activities and events of an organization. The purpose of this information is to promote the ability of decision makers to This effectively allocates the resources in his possession (or entrusts him). "

So with

In economics, opportunity cost is used to examine everything that must be given up in order to get somethingmoney, time, goods, laborand much more. It even includes a fascinating landscape. You must be mentally prepared. The scope of opportunity costs is so large that it may be far beyond imagination. Consider the following example.

Like most of his classmates, Xiao Wang is also an active supporter of "60 minutes live". Be late, leave early, or even escape or simply not write a dissertation. I do nt know, his grades are a messthree failing homework and all subjects with high credits, so he has to accept the fate (actually the school) arrangementrework (supposedly after canceling the supplementary exam) , The latest initiative of the education system in the 21st century)-pay first and then go to class. Xiao Wang sighed, and then began to calculate the loss, RMB800 rebuilding fee-he knew that buying Discman's plan was a mess.

All weekend, he had to deal with that class of abominable teachers again and take those boring classes.

opportunity cost

In Xiao Wang's opinion, rebuilding means nothing more than loss of money and time. In addition, it seems that there is nothing extraordinary. But economists holding the measure of opportunity cost do not think so. In fact, if Wang sees the opportunity cost of his restoration from the perspective of economics, he will probably be frightened. Once again, the opportunity cost is everything that must be abandoned in order to get something, in order to facilitate the sum of all the losses of Xiao Wang in monetary form. It is necessary to introduce another economic termwillingness to paythe amount of money that people are willing to pay for an item or how important an item is in terms of the amount of money.

As Xiao Wang wrote in his diary, "The sky suddenly went dark." Xiao Wang has put his budget of RMB 800 for Discman to the school finance department. Of course, this is part of the opportunity cost, but not all. In addition, Xiao Wang arranges 8 hours of retaking courses every weekend-what's more terrible is that these courses are not concentrated but are taken twice on Saturday and Sunday. And it takes 18 weeks to complete the weekly calculation of other opportunity costs of his rebuild. On the first weekend, Xiao Wang vowed to change his mind, carefully study the course, and resolved not to run away. However, after completing 4 "long" Saturday math classes on Saturday morning, his mother called to ask him to go back for chicken soup. Although the mother was gentle and loving, if she knew that her baby boy's homework was too poor, he had to take a break. For a while. He didn't dare to tell his mother that there would be a re-scheduled course at night, so, very helpless, Xiao Wang chose to go home instead of continuing his re-scheduled course. That night, Xiao Wang drank a delicious chicken soup and revisited an episode of "long vacation". He felt good. However, the situation here is not great. Due to too many absentees in the English re-class on Sunday evening, the rigorous teacher has become furious. They have to name each one and record the absent, and even say "call them to be careful later". As a result, Wang was so nervous that he was afraid of the teacher who sinned. After thinking about it, he spent RMB98 yuan to buy a large English-Chinese dictionary as a gift, and then tried his best to please the teacher in exchange for the lost impression points. Finally, he was forgiven by the teacher, but how much did he lose?

opportunity cost

"Brothers sleeping in the upper bunk" called to know when Xiao Wang was retaking the course, and he was still dreaming about spring and autumn in the warm blanket-dreaming about idol Wong Fei, and even singing "Ambiguous" with her. Is the world's first enjoyment (utility). After answering the phone, Meng was awakened and cold. A warm quilt is nothing, plus a big dream of spring and autumn, especially when the "Feng Daoshuang Jian" is cold, the situation can be greatly improved. Such things as sweet dreams are strange, or fragrant, or exciting. In short, they are full of temptation. Only Xiao Wang knew that in the next four months, he could only have one dreamrebuilding the nightmare. In other words, the rebuild will deprive Xiao Wang of the possibility of any beautiful dream within four months. His dreaming is not high frequently, and the dream is only once a month (scarcity). And there are not too many dreams, about four kinds: "rich dreams", "emperor dreams", "wife dreams" and occasionally "second wife's fantasy". In this way, because of rebuilding and ignoring the star dream that has been awakened this morning, Xiao Wang not only lost the opportunity to fly Huang Tengda and become a great figure, but also his wife and second wife-although it was only a dream. So, these should be included in the opportunity cost of rebuilding, but how to measure the value of the dream?

Don't forget that the technical term quoted abovewillingness to payis just a measure of how much a computer will cost. Based on a comprehensive consideration of utility and scarcity, Xiao Wang's willingness to pay is: a "rich dream", "emperor dream" or "wife dream" is about RMB 100 yuan, and the "second wife" has a 20% discount, that is, RMB80 yuan. In addition, although he is not a big man in every day, Xiao Wang's time can not be ignored. Calculate the bus time between the mother and the teacher, which is almost one hour, blindly search for gifts and humbly scream at the teacher's house for one hour, just 6 hours. It s not easy to measure the cost of time. This is how it works: Xiao Wang s dead party, Xiao Li, is very similar regardless of his academic level or other conditions, with only one differenceXiao Wang spends 8 hours every weekend on "shameful "Hateful" re-taking course, but Xiao Li spent the same time on "respectable and admirable" home tutoring, and charged RMB 25 yuan / hour tuition fee. Well, what I want to show is that, aside from the difference in the nature of labor (one encounters cold eyes and one is a great courtesy), every hour that Xiao Wang spends in retaking the course is at least RMB 25 yuan. Simple four arithmetic, it is clear that the opportunity cost of rebuilding is as high as RMB628 in the first week.

In the following days, Xiao Wang didn't dare to be too arrogant. He should try not to be absent from the re-take course, but not everything was under control. It was the ninth weekend of the bright spring and peaceful Ansel, which was especially suitable for listening to the rehearsal lecture, and it was another phone callnot a mother, this time a dream girlfriend. The girlfriend lost her temper and complained "to avoid it for more than two months". Xiao Wang tried his best to persevere and moved out of all kinds of excuses. First, he had to accompany the deceased "maternal grandmother" to see the doctor, and then picked up the unborn "little sister" to leave school. Even though his girlfriend is as stupid as a pig, with the sensitivity and intuition of a woman, he still exposes his excuse and hurts him: "Since it is so annoying, there is no need to meet again ..." Xiao Wang was terrified and wanted to make another excuse, but Na Jiaren was so heartbroken that she was hung up on the line. Xiao Wang understands his girlfriend's personality and understands that there is no room for recovery, but he cursed and rebuilt, "depriving Discman and harming the sweetheart of the baby". Xiao Wang knew that it would not be a good thing to rebuild, but he did nt think it would be so costlythe lesson was just completed halfway through, and his girlfriend was also involvedif he did nt do it again, of course, he would nt leave the girlfriend alone because of the tight curriculum. Things today. Maybe he has to pay more than that. Let's calculate Xiao Wang's loss this time.

Losing a girlfriend is not a big deal, but the end of an unforgettable love is always sad. Although things like love are invisible and untouchable, they actually have an opportunity cost. They can even be calculated and scientifically calculated. At first it may be concluded that love is priceless. After all, no matter how much money you give, you may not voluntarily give up your feelings for someone you love. However, for the cost-benefit analysis, this conclusion has caused some results that are totally inconsistent with reality. If you really think that love is priceless, then you should nt bother asking your girlfriend to share the cost of dinner together, or take it upon yourself-since love is priceless, a few meals by candlelight dinner is nothing. Similarly, when a girlfriend points to a 3-carat diamond ring and says "beautiful", she should buy it without hesitation. Of course, sometimes you can consider 3 seconds, but you must buy it, because a diamond ring is so insignificant compared to great love, but it can please your girlfriend and consolidate priceless love. But the fact is that not every man is willing to afford the bill for every candlelight dinner, and when facing girlfriend shopping-especially when buying expensive items like diamond rings, many men think longer than 30 minutes. And usually the result of deep thinking is that at least 78% of them shake their heads resolutely (if love is priceless, they will not risk offending their girlfriends and cause love to break).

Once you accept that love is not priceless, but has its notion of hidden value, how to determine the value of it? The method is: observe how much money a person is willing to risk losing love. For example, most men and men can afford to pay for a candlelight dinner several times in order to maintain love, but if the price is a 3-carat diamond ring, 78% of most men and men choose to risk losing their love. Although different people have different degrees of risk-taking for love under the same price code, by comparing the probability that people are willing to take risks at various values, it is still concluded that, in general, the value of love is about RMB 10,000. Please note that this price does not necessarily mean that you can exchange for a love in the market. It only reminds you that if one day your girlfriend says "goodbye" and you do nothing and don't think about redemption, then you have suffered so much loss. Because love is a two-way interaction, girlfriends also suffer almost the same loss of RMB10001 (women are usually more vulnerable). By the way, I encourage women all over the world to never break up with their boyfriends easily, otherwise they will suffer losses. Will be bigger than the other party. Back to the topic, is the value of love between Xiao Wang and his girlfriend also RMB10,000? Considering that Xiao Wang's girlfriend is tender and watery, and tame as a cat, such a woman is very valuable, and a four-digit RMB1000 is added to it. As a result, Xiao Wang's loss this time was RMB11,000.

With women, chickens and dogs are restless; without women, they are deserted. Without his girlfriend, Xiao Wang's heart calmed down, and Hu Hu was confused until the eve of the exam. Xiao Wang's memory has always been bad. I wonder if some old memories have somehow been restored tonight. First of all, he remembered that in the 18-week re-course, he listened once, read the textbook 3 times, read 5 paragraphs of the essay, and memorized 7 lines of words; then he thought that after reading two sets of novels, he missed four periods I played six games and slept eight times. Such a learning attitude is naturally difficult to learn enough knowledge to cope with the examination. In response to the old clever phrase, "I can't bear to look back", all I can remember about old things is trouble. Don't want to deceive yourself, just feel ashamed. Xiao Wang is not only upset, but also nervous. He didn't know if that big dictionary was enough to affect the objectivity of the teacher's marking. Without a miracle, he would have no chance of passing tomorrow's exam. So, wandering between worries and nervousness, Xiao Wang completely lost sleep. He is not unaware that the rest of the night before the exam is very important. There is no way. He has no sleeping pills. The result can only be-counting sheep. He counted and counted. When he reached the 3456rd, the alarm clock tuned for the exam rang, it was already 7 o'clock in the morning. This means that the rebuilding caused Xiao Wang to lose a night's sleep.

What's the value of a night's sleep? If it is normal, it may only mean dark circles on both sides and a few small acne. But on the eve of the test, one night's insomnia is likely to cause the test score to fall from 61 to 59-by no means alarmist, or use willingness to pay, and measure the value of one night's insomnia and let it be done. This is the time to calculate the general ledger. The renewal fee is RMB 800 yuan, the first week is RMB 628 yuan, 17 8 hours, the class time is RMB 25 yuan / hour, a love valued at RMB 11,000 yuan, plus a night's sleep. Without using any calculator, the most crappy students can calculate the opportunity cost of Xiao Wang's rebuild-a shocking figure-RMB15828 Atleast. Well, even without a girlfriend, the opportunity cost of rebuilding will be very high.

Suppose you go to a free ticket to American singer Eric Clapton's concert tonight. Note that it cannot be resold. But another American singer, Boh Dylan, is also giving a concert tonight, and Dylan s concert ticket price is $ 40. Of course, it's okay to go to see his performances at other times, but the price is $ 50. In other words, if Dylan's fare is more than $ 50, he would rather not watch it, even if there is nothing else to do. In addition, there is no other cost to see the two perform. What's the opportunity cost of going to a Clapton concert? To watch Clapton's concert, the only thing that must be sacrificed is to watch Dylan's concert. Not going to see Dylan's concert will miss a performance worth $ 50, but also saves the $ 40 to pay for Dylan's concert ticket. So, if you don't go to Dylan's concert, the value to give up is 50 to 40 = 10 (USD). If you think Clapton's concert is worth at least $ 10, then you should watch it; otherwise, go to Dylan's concert. In general, opportunity cost is one of the two (or three) key concepts to be introduced in the introduction to economics. But based on the solid evidence at hand, most students don't grasp the concept from any angle. To get closer, economists Paul Ferraro and Laura Taylor asked the Clapton / Dylan questions to a few groups of students to see if they could answer them correctly. They have multiple choice questions with only 4 answers: a. 0 USD b, 10 USD c. 40 USD d. 50 USD

As mentioned earlier, the correct answer is $ 10, which is the value of not sacrificing Dylan's concert. However, Ferrero and Taylor asked this question to 270 undergraduates in economics, and only 7.4% chose the correct answer. Because there are only 4 options, even if students choose randomly, the accuracy rate should be 25%. It seems that the students feel embarrassed to master this knowledge. After that, Ferrero and Taylor asked the same question to 88 students who had never taken an economics course. This time, the accuracy rate was 17.2%-twice as high as that of students who took economics courses. Still lower than the random selection. Why didn't students who took economics courses perform better? The main reason is that in a typical introduction class, the professor will instill hundreds of concepts into the students. The opportunity cost is only one of them, and it is vague and passed in one stroke. If students don't spend enough time on it, and don't practice repeatedly in different examples, they can't really understand it. But Ferrero and Taylor proposed another possibility: lecturers who teach economics themselves do not have the basic concepts of opportunity costs. When the American Economic Association held its annual meeting in 2005, the two of them asked the same question to 199 professional economists. Only 21.6% chose the correct answer, and 25.1% thought to see Clay The opportunity cost of a Putton concert was $ 0, 25.6% thought it was $ 40, and 27.6% thought it was $ 50.