Opportunity cost has to do with what it costs a company to produce goods or services in terms of what could have been earned by using those same resources to produce different goods or services. Essentially, opportunity cost is all about comparing one production option to another production option. This involves determining the value received from one going with the production of one option versus what could be earned by choosing to go with a different option, using the same raw materials.
Opportunity costs can be understood by thinking in terms of the various products that can be made with the same basic materials. For example, corn is a common food commodity. The corn may be processed and sold in cans, or prepared with a slightly different process and sold in frozen packages. Alternatively, the corn could be ground into meal and packaged in sealed bags. The seller would want to investigate the relative merits of producing each product type from the same commodity, and compare the cost involved with choosing one line of production, or opportunity, over the other two.
In calculating true opportunity cost, it is important to look at several aspects of economics. First, there is the production cost involved with each production option. Second, there is the matter of storage costs while the finished goods await sale. Last, there is the scarcity of the raw materials and what impact availability has on the final and real cost for the materials. While other factors also apply, any economist will include these three factors in assessing the output foregone by choosing one type of production over another.
Opportunity cost can apply to many different situations. The materials involved may include land, labor, working capital, or any type of food commodity, including beef or fish. Generally, the idea behind calculating opportunity cost is to provide guidelines for the most efficient use of materials so that the greatest amount of profit is returned from the venture.