When making procurement decisions, the opportunity cost must be evaluated. Resources are scarce while human needs are unlimited. Economists continue to face the problem of scarcity and choice. One thing is bought at the expense of another. Since resources are limited and needs are unlimited, persons habitually purchase products that will give them the maximum value. Opportunity cost is the loss of probable gain from the 2nd best forfeited alternative when one alternative is picked. For example, one has $9500 which they can use to buy a bungalow or a Prado as those needs are at the topmost of his priority list. If they decide to buy a bungalow, then they have to sacrifice the Prado. Opportunity cost is, therefore, the value that they would have secured by purchasing the Prado.
In the kitchen case, despite the opportunity cost being altered to appear insignificant, it’s worth is essentially large. The income of an individual determines their consumption bundles. If a low income earner buys the diamonds using the money reserved for renovating the kitchen, it will dismantle the priorities since it may be hard to raise the prerequisite amount. However, for a consumer whose income is high, spending on diamonds will not displace their topmost priorities since they can distribute their income. Purchasing the diamonds will cause the kitchen renovation process to be delayed by a year. Moreover, the urgency to renovate the kitchen must be pondered in calculating the opportunity cost since it has an effect on the best choice to be made. Kitchen renovation is apparently basic while the diamond earrings are virtually a luxury. Purchasing the diamond earrings will lead to a delay of one year in the renovation of the kitchen. The earrings are luxurious and the renovation is apparently basic. It is therefore realistic to forego the earrings and consider undertaking the renovation.
Fredrick needs to purchase the stereo but he has to contemplate the amount at hand and the best combination to purchase so as to obtain the highest value. Additionally, his choice is influenced by the desire that was more persuasive, his perception for the 2 brands and the total number of CDs that he was already in possession. Having $1000, if Fredrick purchases the pioneer at $1000, it definitely means that he will have to sacrifice $300 together with the Sony brand system. However, the craving for the CDs is correspondingly pressing. Fredrick’s taste and preference was largely on pioneer. Procuring the pioneer at the expense of Sony and the $ 300 CDs would end up in an opportunity cost of $300 CDs plus Sony. Nonetheless, he resulted to procuring the CDs and the Sony system at the expense of pioneer. Purchasing pioneer will mean foregoing the Sony and $300 CDs hence, it is an opportunity cost. It is therefore flawless to say that the desire for more pressing wants, what one already possesses and taste come into consideration when computing opportunity cost and determining the alternative to implement.
In the political case, deciding to purchase the up-to-date heavy bomber means that, the heaps of wheat and the modern brick schools will have to be foregone. Additionally, the new homes approximated to house about eight thousand people must also be forfeited. The welfare of the people seems to be at the heart of President Dwight’s heart more than the bomber since he does not believe that there will be a war. The opportunity cost of foregoing the bomber is minor as equated to the probable suffering and loss that the people will undergo if the other improvements are foregone. It is therefore realistic to forego the modern heavy bomber. Values, beliefs and ideologies influence an individual’s decisions and play a great role in the calculation of opportunity cost.
Work cited
Shane. CONVERSABLE ECONOMIST: The Persuasive Power of Opportunity Costs. (2011).Retrieved February 1, 2014, from http://conversableeconomist.blogspot.com/2011/07/persuasive-power-of-opportunity-costs.html
