We observe the cost or price of an item or product before purchasing it. Cost is the value that is considered to produce the product or that item.
Cost is one of the major factors in selecting one item over two other items of a similar kind. We have many kinds of costs. We have different kinds of costs based on the concept of how they are calculated.
Opportunity cost and Marginal cost are two concepts related to the cost.
- Opportunity cost represents the value of the next best alternative that is forgone when making a decision. In contrast, marginal cost refers to producing an additional output unit.
- Opportunity cost is a subjective concept, depending on individual preferences and choices, while marginal cost is an objective measure based on production costs.
- Opportunity cost is relevant in resource allocation and decision-making, whereas marginal cost is used in pricing strategies and determining optimal output levels.
Opportunity vs Marginal Cost
Opportunity cost refers to the value of the best alternative forgone when making a particular choice. It is the cost of the next best alternative use of the resources, such as time or money. Marginal analysis is important to consider when making decisions because it helps individuals and businesses.
Opportunity cost is the value that a person might have received instead of another option.
It can also be defined as the maximum amount that a person has foregone by accepting some other work instead of it.
These are not real costs; they are just illusions costs that it might be. They have overlooked costs.
Marginal cost is the additional cost required to produce another new unit. It is simply the monetary value. It is termed the basic concept of finance and economics.
Marginal cost is the additional value required to manufacture an excess product or service. Marginal costs include fixed costs and variable costs too.
|Parameters of Comparison||Opportunity Cost||Marginal Cost|
|Definition||Opportunity cost is the difference value observed during the selection of one item instead of another.||Marginal cost is the value of producing an extra item.|
|Monetary value||Opportunity cost may or may not include the monetary value.||Marginal cost always includes the monetary value.|
|Visibility||Opportunity costs are not that transparent.||Marginal costs are transparent and clearly visible.|
|Included in||Opportunity cost is included in the choice of consumers.||Marginal cost is included in the cost of production.|
|Others||Opportunity costs include the benefits or advantages like money, time, etc., in selecting an item instead of another.||Marginal costs don’t include the benefits or advantages in selecting an item instead of another.|
What is Opportunity Cost?
Opportunity cost is the value of benefits or price that had been forgone in choosing an item or service over the other. Opportunity costs not only include extra value in terms of money but also contains the value of time and other benefits too.
Opportunity cost is simply the difference between choosing one item over the other. They are not seen clearly. They are simply calculated by comparing the items.
For instance, Jayanth works in a bakery as a chef. He earns 50,000 per month. But he thought that he could benefit through earning more by setting up a bakery on his own.
After setting up his bakery, Jayanth earns 25,000 only in the first month. Here, he could have earned 25,000 more if he works as a chef. He lost 25,000, this is the opportunity cost of Jayanth in this month.
Next month Jayanth earned 1 lakh from his bakery. In this month, 50,000 is the opportunity cost of Jayanth during the second month.
Opportunity cost is the benefits lost in choosing an item or service over another item or service.
It does not affect the cost of production. It does not depend on any other costs or the total cost of production of goods or services.
It is simply the difference cost between the benefits of a chosen item over other the item.
What is Marginal Cost?
Marginal cost is the extra value required to produce an extra unit, service, or item. We have two costs included in the marginal cost.
They are static costs and non-static costs. Static costs are costs that do not change on the basis of any parameters. While non-static costs change due to the parameters of production.
Hence, we can state that marginal costs are dependent on non-static costs.
For example, consider a swimming pool in a resort. The cost of filling the pool with water will be the same for 5 members or 10 members.
As we need to fill the pool complete with water for a minimum or a maximum number of people. So, the cost required to pump the water comes under the static costs.
While chlorine requirement for cleaning depends on the season and members in the pool. Hence the cost of chlorine comes under non-static costs.
Here Marginal cost for service depends on the chlorine cost, which comes under the non-static costs.
Marginal cost is associated with the production of additional units or services of some kind. Marginal costs bring out changes in the total cost of production of the service or items.
Marginal cost is dependent on non-static or variable costs. Hence, marginal cost exists when there exist non-static costs in the total value of production.
Marginal cost can be defined as the ratio of the change in the total cost of production to the change in the quantity of the production.
Main Differences Between Opportunity and Marginal Cost
- Opportunity cost is the value or the benefits of gained or lost choosing an item over the other. While Marginal cost is the value of producing extra item or service.
- Opportunity cost is independent of total cost of production. In contrary Marginal cost depends on the variable costs of total cost of production.
- Opportunity costs does not depend on external parameters like labour, time or outputs. Marginal costs depend on the external parameters like worker wages etc.,
- Opportunity cost may or may not be monetary value. While marginal cost is always a monetary value.
- Opportunity cost is the monetary value or benefit differences between two items or more than two items. While marginal cost is amount required to produce an item.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.