LESSON 22
.Business choices
Opportunity cost: the benefit lost from the next best alternative
The problem:
- Land, labour, capital and enterprise are limited resources
- However our wants are unlimited
- This cause scarcity
- As business people we need to decide how best to use those scarce resources, so
we make choices.
When making decisions, the cost of not selecting an alternative is an opportunity cost
.Trade-offs
Where a decision-maker faces a compromise between two different alternatives, for example
paying dividends to shareholders and reinvesting profits in the business.
A very important trade-off is between Risk and Reward. It’s often necessary to take bigger
risks in order to collect higher rewards, however high risk=large losses.
To find the right balance, you can:
- List the adv and disadv of each
choices and try to determine which
carries the heaviest weight
- Balance short and long term
- Think about which key staff will
support a particular idea and who will
oppose it. The views of others can be
a powerful influence.
.Business choices
Opportunity cost: the benefit lost from the next best alternative
The problem:
- Land, labour, capital and enterprise are limited resources
- However our wants are unlimited
- This cause scarcity
- As business people we need to decide how best to use those scarce resources, so
we make choices.
When making decisions, the cost of not selecting an alternative is an opportunity cost
.Trade-offs
Where a decision-maker faces a compromise between two different alternatives, for example
paying dividends to shareholders and reinvesting profits in the business.
A very important trade-off is between Risk and Reward. It’s often necessary to take bigger
risks in order to collect higher rewards, however high risk=large losses.
To find the right balance, you can:
- List the adv and disadv of each
choices and try to determine which
carries the heaviest weight
- Balance short and long term
- Think about which key staff will
support a particular idea and who will
oppose it. The views of others can be
a powerful influence.
