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What Is Constant Opportunity Cost?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 10 September 2016
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    Conjecture Corporation
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Constant opportunity cost is a situation in which the costs of pursuing a particular opportunity does not increase or decrease over time, even if the benefits derived from the activity should change in some manner. The term is often employed when describing a production process in which the costs associated with producing goods and services remain the same, while still allowing higher production levels to be obtained. Typically, this means that the cost of using additional resources to produce more goods does not lead to a decrease in cost per unit produced, nor does it cost any more to produce each of those units.

With constant opportunity cost, the relationship between the costs and the number of units produced remains the same. This is different from situations in which the opportunity cost decreases, such as when a manufacturer is able to obtain discounts by ordering more raw materials to be used in the production of additional goods, which then leads to a lower production cost per unit and presumably more profit per unit as the goods are sold. It is also different from increased opportunity cost, in which the effort to produce additional goods actually results in increasing the average cost of production on each unit produced, a situation that will sometimes discourage the creation of additional units.

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While often employed in a manufacturing environment, the general idea of constant opportunity cost can also be related to other types of business and financial situations. For example, if a manager needs to fill a position within a department and has the option to offer the position to an existing employee with the same level of experience and expertise as the person who recently vacated that position, this would mean the company would incur no additional expense in filling the position. At the same time, if the job was offered to a new employee who lacked the experience, this would mean devoting additional resources to train the individual, which in turn would not keep the opportunity cost associated with the task at a constant level.

Determining that a certain activity can be managed with a constant opportunity cost may be an indication that it is in the best interest of the company to move forward with that activity, rather than choosing an approach which would actually mean greater expense without creating a corresponding increase in benefits. In order to determine if this state actually exists, it is important to identify every cost as well as every advantage or benefit derived from the activity, determine what additional expenses would be required to increase the activity, then project any increases in benefits that would be achieved. If the benefits do not justify the additional expense, then constant opportunity cost does not exist, and the strategy may not be in the best interests of the company or individual considering the activity.

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Post 1

There would most likely still be additional costs associated with filling a new position with an existing employee, although they still may not be as high in every circumstance as hiring a new employee.

Most of the time, existing employees are not going to make lateral moves between jobs in a company. Instead, they are more likely to move to jobs with more responsibility than their current job, usually meaning increased pay.

In addition, the company may need to hire someone new anyway to fill the position the existing employee left behind.

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