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Because there are unlimited wants and limited resources in the world with a constantly growing population and resources constantly being consumed. Such as, gold. There's limited gold in the world but there are still high demand for gold to make jewellery.

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The next best alternative forgone for a better choice

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The economic problem cannot be solve,

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The next best alternative forgone for a better choice

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The economic problem. All societies face economic problem, which is the problem of how to make the best use of limited, or scarce, resources. The economic problemexists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited.

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The economic problem cannot be solved since

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When there is a destruction of some of its resources,

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there are unlimited wants and limited resources so no all wants can be fullfilled as we need to allocate resources effectively

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Limited resources and unlimited wants and resources are scarce.

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Limited resources and unlimited wants

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The economic problem can never be solved because there are unlimited wants but the world has scarce resources which are not enough to satisfy the wants.

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Scarcity - Unlimited wants and limited resources. Wants will grow more than resources

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There are unlimited needs and wants

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when the next best alternative is forgone for one alternative

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the next best

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b) there are limited resources and unlimited wants and needs

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b) there are limited resources and unlimited wants and needs

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The economic problem states that the world has limited resources but unlimited wants. Since unlimited wants cannot possibly be satisfied with the scarce resources present, the economic problem cannot be solved. For instance, there are a growing number of homeless people since homes cost a lot of resources to build and thus cannot be provided for free.

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The next best alternative forgone

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The next best alternative forgone

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Forgone

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A lost of other alternative when one alternative is chosen

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The next best alternative forgone in when we make a particular choice

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The next best alternative forgone for the next best value

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Forgone

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Opportunity cost is the next best alternative forgone

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The next best opportunity that is forgone when choosing another

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The next best opportunity that is forgone when choosing another

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2 marks brah

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The next best alternative forgone that must be given up

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next best alternative forgone for one alternative

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the next best alternative forgone to gain the better optiont

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The benefit we could have enjoyed from the next best alternative we choose to go without

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Google is fren

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What Is Opportunity Cost?

Opportunity cost represents the potential benefits that a business, an investor, or an individual consumer misses out on when choosing one alternative over another. While opportunity costs can't be predicted with total certainty, taking them into consideration can lead to better decision making.

Key Takeaways

Formula for Calculating Opportunity Cost

The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. Consider a company that is faced with the following two mutually exclusive options:
Option A: Invest excess capital in the stock market Option B: Invest excess capital back into the business for new equipment to increase production
Assume the expected return on investment (ROI) in the stock market is 10% over the next year, while the company estimates that the equipment update would generate an 8% return over the same period. The opportunity cost of choosing the equipment over the stock market is 2% (10% - 8%). In other words, by investing in the business, the company would forgo the opportunity to earn a higher return-at least for that first year.

Opportunity Cost and Capital Structure

Opportunity cost analysis can play a crucial role in determining a company's capital structure. A business incurs an explicit cost in taking on debt or issuing equity because it must compensate its lenders or shareholders. And each option also carries an opportunity cost.

Money that a company uses to make payments on its bonds or other debt, for example, cannot be invested for other purposes. So the company must decide if an expansion or other growth opportunity made possible by borrowing would generate greater profits than it could make through outside investments.

Companies try to weigh the costs and benefits of borrowing money vs. issuing stock, including both monetary and non-monetary considerations, to arrive at an optimal balance that minimizes opportunity costs. Because opportunity cost is a forward-looking consideration, the actual rate of return (RoR) for both options is unknown at that point, making this evaluation tricky in practice.

Example of an Opportunity Cost Analysis

Assume that a business has $20,000 in available funds and must choose between investing the money in securities, which it expects to return 10% a year, or using it to purchase new machinery. No matter which option the business chooses, the potential profit that it gives up by not investing in the other option is the opportunity cost.

If the business goes with the securities option, its investment would theoretically gain $2,000 in the first year, $2,200 in the second, and $2,420 in the third.

Alternatively, if the business purchases a new machine, it will be able to increase its production. Knowing that the machine setup and employee training will be intensive, and the new machine will not be up to maximum efficiency for the first couple of years, the company estimates that it would net an additional $500 in profit in the first year, then $2,000 in year two, and $5,000 in all future years.

By these calculations, choosing the securities makes sense in the first and second years. However, by the third year, an analysis of the opportunity cost indicates that the new machine is the better option ($500 + $2,000 + $5,000 - $2,000 - $2,200 - $2,420) = $880.

The Most Expensive Pizza Ever?

Opportunity Cost vs. Sunk Cost

A sunk cost is money already spent at some point in the past, while opportunity cost is the potential returns not earned in the future on an investment because the money was invested elsewhere. When considering opportunity cost, any sunk costs previously incurred are typically ignored.

Buying 1,000 shares of company A at $10 a share, for instance, represents a sunk cost of $10,000. This is the amount of money paid out to invest, and it can't be recouped without selling the stock (and perhaps not in full even then).

From an accounting perspective, a sunk cost also could refer to the initial outlay to purchase an expensive piece of heavy equipment, which might be amortized over time, but which is sunk in the sense that the company won't be getting the money back.

Opportunity Cost vs. Risk

In economics, risk describes the possibility that an investment's actual and projected returns will be different and that the investor may lose some or all of their capital. Opportunity cost reflects the possibility that the returns of a chosen investment will be lower than the returns of a forgone investment.

The key difference is that risk compares the actual performance of an investment against the projected performance of the same investment, while opportunity cost compares the projected performance of an investment against the projected performance of another investment.

Accounting Profit vs. Economic Profit

Accounting profit is the net income calculation often stipulated by the generally accepted accounting principles (GAAP) used by most companies in the U.S. Under those rules, only explicit, real costs are subtracted from total revenue.

Economic profit, however, includes opportunity cost as an expense. This theoretical calculation can then be used to compare the actual profit of the company to what its profit might have been had it made different decisions.

Economic profit (and any other calculation that considers opportunity cost) is strictly an internal value used for strategic decision making.

What Is a Simple Definition of Opportunity Cost?

Opportunity cost refers to the hidden cost associated with not taking an alternative course of action.

What Is an Example of Opportunity Cost in Investing?

Consider a young investor who decides to put $5,000 into bonds each year and dutifully does so for 50 years. Assuming an average annual return of 2.5%, their portfolio at the end of that time would be worth nearly $500,000. Although this result might seem impressive, it is less so when you consider the investor's opportunity cost. If, for example, they had instead invested half of their money in the stock market and received an average blended return of 5% a year, their portfolio would have been worth more than $1 million. Their opportunity cost in this case would be over $500,000.

How Do You Predict Opportunity Cost?

Any effort to predict opportunity cost must rely heavily on estimates and assumptions. There's no way of knowing exactly how a different course of action will play out financially over time. Investors might use the historic returns on various types of investments in an attempt to forecast their likely returns. However, as the famous disclaimer goes, "Past performance is no guarantee of future results."

The Bottom Line

While opportunity costs can't be predicted with absolute certainty, they provide a way for companies and individuals to think through their investment options and, ideally, arrive at better decisions.

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Opportunity Cost: Definition, Calculation Formula, and Examples

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Opportunity cost is the potential forgone profit from a missed opportunity-the result of choosing one alternative over another.

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Next best alternative