Investment Opportunity Costs

In Economics the cost of something includes funds spent carrying out any action. For consumers and producers costs determine how much one is willing to pay or invest in. This could be based on income or current financial status of the consumer or producers. Cost effects the consumer demand and producer sale outcomes. It can also determine the worth of whatever is being sold in comparison to a substitute. The types of costs that affects consumer and producer investments include fixed costs, variable costs, opportunity costs, marginal costs, and economic costs. In economics, investments can be defined as an asset or item that is purchased with the hope that it will foster income or eventually reap benefits in the future. In economics an investment …show more content…
As a result opportunity costs tend to be most relevant for two mutually exclusive events. In investing, it is the difference in return between a chosen investment and one that the consumer or producer passed up. Considering the potential outcomes of various investments decisons, businesses will look for the option that is most likely to generate the greatest return. Often, this can be found by looking at the expected rate of return for a given investment. Even with this being the case, businesses must also still consider the opportunity cost of every option. For example, if given a set amount of money for an investment, a business must choose between investing funds in securities or using it to purchase new equipment. No matter which option is chosen, the potential profit that is forgone by not investing in the other option is called the opportunity cost. This is often expressed as the difference between the expected returns of each option. Opportunity cost analysis also plays a crucial role in determining a business's capital structure. While both debt and equity require some degree of expense to compensate lenders and shareholders for the risk of investment, each also carries an opportunity cost. Funds that are used to make payments on loans, for instance, are therefore not being invested in stocks or bonds which offer the potential for investment income. The company must decide if the expansion made possible by the leveraging power of debt will generate greater profits than could be made through