Opportunity Cost, Additional Steps

In my previous post on opportunity costs, I noted the following :

It is important to note that no matter how great or small the benefits of the actual choice, they have no effect on the opportunity cost, which is only associated with the precluded best alternative ‘B’. Even if the apple comes with $10M and will bestow eternal life on its possessor, its opportunity cost still rests entirely with the orange. Utilities are subjective and can only be ranked in an order of preference. They cannot be added or subtracted.

This is still true, but an important relationshop does exist.

If we consider the universe of all posssible superior choices 'A' which share the same opportunity cost, that is, the complete benefit package associated with the precluded choice 'B', then the benefit packages associated with each and every one of the superior choices 'A' are bounded from below in their ranking by the opportunity cost under consideration. This seems rather obvious, but I foresee using it in analyzing future examples, and wanted to write it down.

On the subject of opportunity cost itself, we need to recognize a bifurcation.

All of my discussion above deals with an economic opportunity cost, where all values and choices result from the subjective judgements and purposeful actions of individuals. As a social science, economics must deal with these realities.

However, an alternative, more limited kind of opportunity cost exists and is appropriate for many applications.

This alternative opportunity cost is largely, and possibly entirely, concerned with values expressed only in terms of money and prices.

For example, a company president is ideally tasked with maximizing shareholder value, expressed in dollars. The subjective preferences of neither the president nor the shareholders are directly involved. All decisions made by management must consider their monetary opportunity costs.

For this alternative opportunity cost, economics itself is at most partially involved. Directly involved are accounting, management, planning, engineering, etc.

I suspect that many of the difficulties involved in understanding opportunity cost are the result of failing to adequately segregate the two types of opportunity cost.

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