The opportunity cost economics works well when you can look into your multiple options to select the best one for your business. When you need to master one concept of economics for improvement of your managerial decisions, my vote goes for the trade-off. You have to ensure using limited resources in the most efficient way possible, to maximize your goals.
Because resources are scarce, you are faced with decisions based on how to use best the resources you have available. Individuals, businesses, and society as a whole must make these types of choices. The alternatives you choose to accept will always be at the cost of those you must inevitably deny. Well, balanced decisions are especially important when they affect a greater collective. Your highest priority will always be to foster that which promotes the well-being of yourself and your business. Carefully considering opportunity costs will enable you to make the best possible choices, given all the alternatives.
Not all opportunity costs represent a monetary loss. They can be abstract at times, and even intimate in nature. Sometimes you must consider your passion, or attainment of pleasure, or a sense of having peace of mind. Explicit costs are opportunity costs that call for an outflow of cash, while implicit costs are those that do not.
Four components make up scarce business resources: land, labor, capital, and enterprise. The land encompasses all natural resources. Labor includes all physical and mental achievement. Capital comprises all equipment that enables development of production. Enterprise is the system of incorporating the other three aspects into the production process. Your goal, as a successful business manager, is to maintain all of these components in a well-balanced fashion.
As a manager applying the concept of opportunity cost economics in business, there are a few things you should keep in mind. You should first be able to identify all resources that are available and under your control. Once you have identified those, you should then determine the best possible use for each by weighing them against their trade-offs.
Three essential priorities that you should always consider are cash, profit, and net worth. Managing cash flow is mostly making sure more money is coming in than that is going out. You must be able to maintain enough cash flow to secure the running of daily operations. Profit is the return you get on whatever capital you manage. This return is what makes the investment of time and resources worthwhile. Using a profit and loss budget and balance sheet helps you evaluate the viability of your business. Net worth gauges how well your business wealth grows by comparing the figures at the beginning and end of the year. Most of the managerial decisions you will make are directly related to the effect they will have on these three areas.
You are encouraged to exercise economic thinking in all your routine decision making. It is always beneficial to consider the trade-off of losses and gains that would result from each of the choices available. You always want to ensure that the advantages of each decision outweigh the costs of the alternatives.
Many operational managers are under-utilizing this valuable concept. They are hardly ever consulted by financial managers, and instead, work within the fixed parameters of budget and target production goals. This can result in missed opportunities for growth. You would do well to consider such missed opportunities when weighing some business decisions.
There are times when opportunity costs are not always clear. Sometimes, the opportunity cost only becomes discernible once the decision has been made. Businesses can rarely anticipate opportunity costs with total accuracy. For this reason, it is important for you to consider all economic and financial expectations when defining opportunity cost economics.
There will always be a trade-off with every decision you make. By using economic thinking when making decisions, you can minimize your losses and maximize your gains. Successful managers know you must weigh the opportunity costs of each decision carefully, in order to see your plans for prosperity come to fruition.