An apparel company manufacturing women only clothing also offers an in-store fitness studio, a café and a climbing wall. The store earns profit in excess of $500k / yr. It is located on the prime real estate. The storeowner pays $15k /month in rent for the building. A real estate agent offering $8k per month for renting the fitness studio approaches the company. What is the opportunity cost of keeping the fitness studio within the store?
As per the simplest definition of opportunity cost, it is such that is incurred when one alternative is chosen over the other. It is also understood as the profit lost because of the emphasizing on a particular alternative. It suggests that whatever profit the forgone alternative may have yielded, it will be considered an opportunity cost.
We know from the information given that an apparel manufacturing company has rented a building, which it has divided into an in-store fitness studio, a café, and a climbing wall. From the store also, the company earns more than $500, 000. The total rent of the building is $15000. If we divide the total rent of the building, $15, 000 for three different enterprises (café, store, and climbing wall), the rent of the store is $5000.
When we subtract the total cost from the total revenue ($5000 – $500, 000), the total profit earned from in-store fitness studio is $450, 000. The rent that is being offered by the real estate agent is $8000. It means that apparel manufacturing companies that have forgone the $8000 for $450, 000. Therefore, the opportunity cost of keeping the store is only $8000 whereas the profit of letting the other alternative forgo is around $450,000.
Opportunity cost is an important economic concept that allows us to understand our decision, especially about investment/production, in greater detail (Tucker). Opportunity cost not only measures explicit costs, but also implicit costs, which allow businesses to take more informed decisions. Also, the concept of opportunity cost has a broad application. For instance, in social sectors too, this concept can be employed to take more informed and sound decisions; however, for more precise and healthy opportunity cost calculations, it is imperative to consider only relevant explicit and implicit costs. Sometimes, we under or overestimate implicit costs, which make calculations faulty (Baer).
Work Cited
Baer, John Wilbur. Introductory Economics. Xlibris Corporation, 2013.
Tucker, Irvin B. Macroeconomics for Today. 9. Cengage Learning, 2016.
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