Opportunity Costs Discussion- Week 1

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Running head: OPPORTUNITY COSTS 1 Opportunity Costs Discussion Student’s Name: Shriya Agarwal Institutional Affiliation: University of Cumberlands Course: 2023 Summer - Managerial Economics (BADM-535-B03) - Second Bi-term Instructor: Craig Hovey Due Date – 7/9/2023

OPPORTUNITY COSTS 2 Chapters’ Reflection The assigned readings contained concepts that were very worthy of my understanding. Business mainly consists of the identification of assets that are in lower valued uses and making them profitable by passing them through refining processes. Value can be described as the willingness to pay for a good or service (Froeb et al., 2015). Wealth creation occurs when assets are moved from lower-valued uses to higher-valued uses. These concepts were very worthy of my understanding. The opportunity cost of an alternative is the profit that must be forgone to pursue that alternative (Froeb et al., 2015). Fixed costs are the costs that do not change as the number of outputs changes. Variable costs, on the other hand, affect changes in output. Accounting profit and economic profit are two different things. The opportunity cost of an undertaking or an investment is the cost of pursuing it in place of other undertakings or investments (Froeb et al., 2015). These concepts were very worthy of my understanding. To obtain average costs, the sum of fixed costs and variable costs is divided by the total units produced. Marginal revenue refers to the additional revenue that is gained from the production and sale of an additional unit on top of previously sold units. Extent decisions are used to determine the amount of output to produce (Froeb et al., 2015). Extent decisions are also useful in deciding the prices to ascribe to products. It is important to break decisions into small steps for effectiveness. These concepts were very worthy of my understanding. Opportunity Costs One decision that my company made that involved opportunity costs was the decision to invest in opening a new branch in a different city. The opportunity cost in this scenario was the potential revenue and profit that could have been generated from making a different investment

OPPORTUNITY COSTS 3 by expanding the current operations in the existing city. At the time, the company saw significant growth potential in the new city, with a larger customer base and access to new markets. The company believed that by opening a new branch, it could capture a larger market share and increase its overall profitability. However, in retrospect, the company should have considered the opportunity cost more thoroughly. A company needs to consider the available options keenly before making an investment decision (Froeb et al., 2015). The company failed to thoroughly evaluate alternative options such as expanding its operations in the existing city or investing in new marketing strategies to attract a larger customer base. By not fully acknowledging and analyzing these opportunity costs, the company made a decision based solely on the perceived growth potential of the new city (Froeb et al., 2015). Profit Consequences To compute the profit consequences of this decision, there was a need to compare the actual profits generated from the new branch to the potential profits that could have been earned from alternative investments or expansions. This process would involve analyzing revenue and cost data from both the new branch and the hypothetical scenarios of investing elsewhere. If the profit consequences of the new branch turned out to be lower than the potential profits from alternative investments, then the opportunity cost was significant. This analysis would provide valuable insights into the extent of the opportunity cost and help make more informed decisions in the future (Froeb et al., 2015). The profits that the company could have earned if it invested in the existing city were $ 700,000 . The company ended up earning only $ 460,000 from the investment in the new city. The opportunity cost in this case was $ 700,000 – $ 460,000 = $ 240,000 , which was the profit consequence that the company experienced.

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OPPORTUNITY COSTS 4 References Froeb, L. M., McCann, B. T., Shor, & Ward, M. R. (2015). Managerial economics. Cengage Learning.

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