What Is the Relationship between Choice and Opportunity Cost?

Choice and opportunity cost are related to the degree that opportunity cost refers to the price of a choice made out of a number of available options. What this means is that opportunity cost is derived by evaluating the value of a choice in terms of another choice that must be forfeited due to the selected one. Choice and opportunity cost may be viewed from a business point of view; however, this concept of choice and opportunity also applies to personal decisions as well.

An illustration of choice and opportunity cost can be seen in the case of a business in terms of the choices that entrepreneurs, CEOs and business managers must constantly make in the natural course of running a business. For instance, if a business has the choice of producing baby diapers or baby wipes, the opportunity cost can be determined by assessing the cost of the selected choice. If the baby wipes and baby diapers cost the same to produce and the business chooses to produce the diapers, the opportunity cost can be derived by assessing the cost of the decision to produce the diapers instead of the wipes. Assuming the business would have made $1,000,000 in annual sales from the wipes, while the sales from the diapers result in $800,000, the opportunity cost for producing the diapers would be $200,000.

The same concept can be applied to consumers as well. If a consumer goes to the store to buy either the diaper or the baby wipes, the opportunity cost is derived by evaluating the relative price of the forfeited item in relation to the chosen item. As such, if the price of one box of diapers is $15, and the price of a pack of baby wipes is $5, the opportunity cost for buying one box of diapers is three packs of baby wipes or $15. The use of the concept of opportunity cost when analyzing several choices allows a business to decide which choice is the best alternative.

In a more personal application, choice and opportunity cost can be derived from the various choices individuals make every day. Assuming an individual is inspired to write a song but chooses to do nothing, allowing the moment of inspiration to pass, the opportunity cost can be analyzed by checking the benefit lost through the choice not to act. If the song would have become a triple-platinum selling, Grammy winner, then the opportunity cost would include factors like lost sales, Grammys and recognition as opposed to the decision not to act.