Critical Evaluation of Opportunity Cost
Benefits of Opportunity Cost
1. Evaluation of different Alternatives: Opportunity costs highlight the loss of benefit that an individual/a company bears when they decide to choose one alternative over another.
2. Comparison of Prices: Opportunity costs help in comparing prices of different alternatives along with their respective risks and returns. Comparison of the total value of benefits derived from different alternatives is the main motive of this concept.
Limitations of Opportunity Cost
1. Subjective Approach: Opportunity cost of a particular choice may vary depending on an individual’s preferences, values, and circumstances. What one person considers to be a high opportunity cost may not be the same for another person. Thus, the concept of opportunity cost is subjective in nature.
2. Considers only Explicit Costs: Opportunity costs only take into account the explicit costs of a decision. It does not consider implicit costs.
3. Does not Consider Time Value of Money: Opportunity cost does not take into account the fact that the value of money changes over time due to inflation. This means that the opportunity cost of a decision made today may be different from the opportunity cost of the same decision made in the future.