Finding Your Opportunity Cost

This is a guest post by Cooperative Extension Intern Preston Ellis. This is valuable information for farmers who are considering new enterprises.

Economic decisions can be some of the toughest decisions we face on a daily basis especially when managing a farm or business. Maintaining your budget and finding your opportunity cost is an easy way to help you make those decisions and maximize profit as well.

Budgets are very useful in regards to having a place to put down where and how you spend your money as well as where your money is coming from. It is important to have a budget because not only will it give you a representation of the current fiscal year you are in, but it will also allow you to budget out future cost and profits so that you can forecast future years.

There are many things that a budget can help identify such as profits, losses and sales. With the information that you put on your budget you will also be able to figure out things such as opportunity cost.

Opportunity cost shows the value of choosing one option over another and illustrates what will be lost, or gained, by choosing that option. It is a great way to equally weigh two or more options, and decide which one to go with based on your economic needs or desired economic state. Opportunity cost actually tells you the value of the next best alternative to the option you have chosen.

The best way to calculate your opportunity cost is to simply take what you are sacrificing by choosing option one, and divide it by what you are gaining by going that route.

The concept of opportunity cost is very useful by not only giving you a monetary value on one decision over another, but it can also help you get an understanding on how much you can produce of a certain product if your time is dedicated to it.

Opportunity cost may not be calculated as easily as it may sound due to many variables that may come into play. That is why keeping a very structured, detail oriented budget is important. If a variable comes into place when calculating your opportunity cost, such as an extra equipment cost, you can easily identify that on your budget and have a quick way to make a calculated decision.

Knowing things such as your production cost and profit margins are two very important things that your budget can help you keep track of and can also help you make key decisions.

A poll from Gallup in 2013 showed that only 32 percent of Americans keep a budget. This illustrates how people could be missing out on economic opportunities or spending their money in the wrong place. Budgets are particularly important to farmers due to the amount of products and equipment that is being used.

Khan Academy and study.com were two key sources that were used in order to write this article.