What is the opportunity cost of production

The concept of "alternative costs" can be attributed to the planning and financial terminology. It is connected with the use of material means, raw materials, technical, human and other resources, which play an important role in the production process. Especially important is the accurate accounting of such costs in enterprises that are not quite profitable or are experiencing some other difficulties. Rational use of the entire material and technical base in this case can help the company stay afloat.

Alternative production costs are the resources spent on the production of one type of product and evaluated from the perspective of the lost opportunities to use them for other, alternative purposes. So, on the account at the enterprise there is some money sum. And it is necessary to update the technical equipment - to buy several machines. At the same time, more raw materials are needed for production. The machines will buy - the raw materials will not be bought, and vice versa. The company management should calculate the options and determine which investment will be more profitable and will bring the production more benefits.

Consequently, the opportunity costs are costs of this kind that, when applied in one place, can not be applied in another. Their main properties are limited and rare. If a woman spends her money on buying cosmetics, at the same time buy them medicines or products, a thing, etc. She already can not. Therefore, using any resource in one area, we lose the opportunity to apply it somehow. This law applies to everyday human life and activities, and financial, scientific, industrial spheres in the size of whole countries, states. The interests of industrial enterprises are especially affected.

By virtue of such a feature, any decision on the production, release of products, goods , etc. Forces to refuse to use the same resources for manufacturing other products or other goods. And the costs spent for production, and there are alternative costs.

The farmer cultivates such crops as squash and tomatoes. Under each allocated a certain area. But one day the farmer decided that tomatoes should be grown more. To do this, he will have to take away part of the plot from the beds with zucchini, reduce the area of the land on which zucchini grow. The alternative costs of each tomato shrub with fruits can be expressed in the number of zucchini, which the farmer will now lose, using land resources for tomatoes.

It is clear that, although this example is given for the production of two species, in fact, they are immeasurably greater. In this case, you can measure alternative costs with the help of money. Then the costs will be taken for the difference between the profit that can be obtained with the most profitable of all alternative uses of resources, and the profit that can be obtained in reality.

It should be remembered that not all costs in production are considered alternative. Usually, any use of resources is planned, distributed and accounted for in advance (renting a building when opening a new office, buying office equipment and other equipment, carrying out repairs in the building, etc.). These costs are not involved in the economic choice and the function of the alternative is not fulfilled.

Speaking about the alternative costs of the enterprise, one should mention their external and internal character. External - this is explicit, this includes the payment of workers, payments for raw materials, fuel, transportation, energy. Those. This is the money that pays for the resources that the enterprise has acquired. Implicit, or internal - these are the costs of using resources that can be managed by the owners of the enterprise, firms, companies, etc.