MGT Notes

Reference, ‘Principles of Economics,’ by N. Gregory Mankiw, 3e, Pg 5

A second principle of economic decision making is the concept of Opportunity Cost. This is defined as follows: the cost of an item or endeavor is what you give up to get that item or pursue that endeavor. As an example, the opportunity cost of utilizing finances to pursue a project is equal to the returns the money could earn if invested appropriately.

Opportunity costs are important to consider when making economic decisions since many times the real costs may not be obvious. In the above example, one might overlook the fringe benefits that may be in play when finances are used to purse a project (for example, does the project benefit other areas of the firm that is not easily quantifiable).