Question

"opportunity cost"?

Define the term "opportunity cost." How may this cost be relevant in a make-or-buy decision?

1 year ago - 1 answers

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Opportunity cost simply put is what you could be doing with your money/time had you not made the buying decision you are considering. We make this in our head all the time and it drives every decision you make. For example
- if you were considering in putting your money in a savings account,and your bank offered you 2%, and another bank offered 5%. The opportunity cost of your decision to put money in your bank would be 5% (what you are giving up by making the decision). Clearly if the opportunity cost is too high, you would make a different decision
- more interesting example that does not even deal with money is choice of dinner. If you were considering going to McDonalds for dinner, the opportunity cost of that would be dinner at Burger King. If you find Burger King to be more delicious than McDonalds, again that would drive your decision to go one way or another.
- time is anothe good example. The opprtunity cost of helping out a friend to move or babysit, might be a relaxed afternoon on you couch watching a movie(again, what you could be doing with your money/time had you not been doing what you did) the relative attractiveness of the decision you are considering to the alternatives you would not be doing will drive the decision.

To answer your question directly, yes. Essentially the opportunity cost of making, would be buying. The opportunity cost of buying, would be making. If you decide to buy something, you gave up the opportunity to make it. Everything else being equal, you would want your decision to have more advantages than the alternatives (opportunity cost) you are giving up.

1 year ago