DQ1

DQ1

Explain why the consideration of opportunity costs may be very relevant to a firm. How can opportunity costs affect a business decision? Use an example to support your answer.

DQ2

Think about a good or service for which you believe there has been a shift in demand or supply. Explain the reasons behind the shift and how that has influenced the equilibrium price.

Jordan response to DQ1

Froeb (2018) defines opportunity costs as the “cost of one alternative as the forgone opportunity to earn profit from the other.” When a business makes any decision between two options that return a profit, business decision-making logic would recommend the option that has the highest return. Opportunity costs are the returns you never receive from the option you did not choose. In order for a business to make informed decisions, the business must consider all costs and benefits that result from each option. In particular, decision-makers must consider the relevant costs and benefits of the decision, leaving out information that is irrelevant.

Opportunity costs are not surface-level details and therefore they can often go unnoticed. However, looking beyond figures that would show on financial reports and considering opportunity costs before making financial decisions can ultimately improve your decision-making. Although these costs can also be found in your personal life, they are often more obvious in business decisions. For example, a financially sound organization that chooses to donate money to charity anonymously also misses the opportunity to reinvest that donation money into new business ventures. From my own life, I have played a small role in making the decision to either have a company Christmas party, or to give employees a Christmas bonus. In this situation, you need to weigh not only the actual costs of doing so but also the morale and enjoyment implications of both options for your employees before making the decision. Employees lose the opportunity to receive extra money on their paychecks by choosing the party. However, if the employees value a Christmas party and the effort put into planning one at the same level as extra cash in their pockets it may be better to proceed with the party.

Whether the decision is small or large, a business decision is likely to have opportunity costs. Outside of obvious financial reasons to make a decision, it is important to consider these costs for better decision-making. Businesses benefit more when they consider not only the opportunities they take advantage of, but also the ones they miss out on.

References

Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2018). Managerial economics: A problem solving approach (5th ed.). Cengage Learning. ISBN-13: 9781337106665

Lisa response to DQ1

According to Marginal Revolution University (2018), marginal costs is “the value a person could have received but passed up in pursuit of another option.” This means that a business must weight both financial benefits and costs to making decisions. Newell notates that for business, opportunity costs must be evaluated quickly as waiting too long may result in diminishing benefits (Newell, n.d.)

One of my favorite companies, Peloton Interactive, just recently expanded their product line. They considered and ended up following through on a cheaper version of their original treadmill (Duprey, 2020). They took the risk of utilizing time and money to develop a quality, but less expensive option for consumers. This cost of development creates an opportunity for Peloton to create both more connective users at $39.99/month AND sell more treadmills at both their high end ($4295) as well at the newer version ($2495). This could create quite a big increase in revenue for them.

Additionally, Peloton is betting on sales increases due to the COVID-19 pandemic. With risk of spread and stay home orders, more people will jump on the opportunity to exercise at home. Consumers perceive the constraints of the pandemic in their opportunity costs of spending either the $2495 or $4295 (Spiller, 2011). A home exercise alternative is more relevant now than before, so as Spiller (2011) says, people are more likely to consider alternatives like a home gym versus a traditional gym.

Duprey, R. (2020). Peloton says a cheaper treadmill could be a rich opportunity. The Motley Fool. Retrieved from: https://www.fool.com/investing/2020/07/10/peloton-says-a-cheaper-treadmill-could-be-a-rich-o.aspx.

Marginal Revolution University. (2018). What is opportunity costs. Retrieved from: https://www.youtube.com/watch?v=x-hYzRncxTc&feature=youtu.be.

Newell, S. (n.d.). Without justifying opportunity costs you might prioritize the wrong features. Product Plan. Retrieved from: https://www.productplan.com/justify-opportunity-cost/.

Spiller, S. A. (2011). Opportunity Cost Consideration. Journal of Consumer Research, 38(4), 595–610. https://doi-org.lopes.idm.oclc.org/10.1086/660045

Professor’s response to DQ2

Re: Topic 1 DQ 2 COVID and the Demand for Air Travel (Substantive Responses to the Question Will Count for Participation Points!)

To the Class,

As the novel coronavirus (COVID-19) continues to weigh heavily on the minds of travelers and the general public, how would you explain the impact of COVID-19 on the demand/supply curves for air travel? Describe the direction of the shift for either curve and opine on whether you believe that the cleaning protocols put in place by airlines are boosting passenger confidence.

-Dr. Y

Note: If your reply to this post is substantial, it will count as a participation. Please keep in mind, one-word answers will not count toward participation points, although the more involved responses will – see DQ and Participation Rubric in Announcements.