How to find alternative cost

In monetary terms the opportunity cost is determined by the formula: price of the selection is equal to the acquisition costs of the option chosen plus the lost income from the rejected option. All of this usually relates to one time unit year, or month.

So if a person can buy two goods, A and b, are equally interesting to him, and selects the same product And n is the amount of money, the cost of a second product defined as m and come to the conclusion that the alternative purchase price And will be equal to m. That is, if necessary, you can buy an alternative product at the calculated price.

The opportunity cost is often applied to human activity. For example, when going to a nightclub calculated the cost of the entrance to the club, food and beverage, and calculated the total amount. An alternative to the club could be dinner at home - it would cost the person in a lower amount. This sum is its alternative value. This calculation may be added that the time spent at the club, it would be possible to devote to the work or the decision of home Affairs.

The man who earns 150 rubles per hour, must understand that one hour at home or with friends will cost him 150 rubles. This is an alternative the cost of one hour of his life.

In fact, the opportunity cost involves the cost of unused capacity. Based on the theory of alternative costs are determined by many factors of economic life: evaluation of investment projects, risk analysis of capital investments, etc. the Question of alternatives arises from the fact that the human and economic resources are not unlimited, so a person has to choose those options that appear to him to by the best at a certain time interval.

One of the main tenets of Economics and entrepreneurship is the idea that money needs to invest in projects that bring the greatest benefit, and invest them need to as long as the income from the project exceeds the opportunity cost of the invested funds.