Opportunity Cost Essay

613 words - 3 pages

As a manager of a financial planning business you have two financial planners, Phil and Francis.Financial Planning BusinessPeople make choices and judgments every day and they have to sacrifice one thing sometimes when they need more of something else. This means, in the economical world, trade-offs. When people are faced with multiple trade-offs they use the opportunity cost principle. Opportunity cost principle is a conclusion or decision that is established by relating it to what must be given up or the next best alternative as a result of the conclusion or decision. Any decision or judgment that engrosses a choice between two or more alternatives has an opportunity cost (O'Sullivan & Sheffrin, 2006). Businesses have to make these types of decisions every day.Phil and Francis are two main financial planners at a financial ...view middle of the document...

These statistics clearly show that Francis has the absolute advantage when it comes to productivity and time by producing twice as many financial statements and answering twenty percent more phone calls than Phil in one hour.To better explain my decision I broke Phil's and Francis's opportunity cost down to better help me make a well educated and analyzed decision. Phil's opportunity cost of 1 financial statement is 8 telephone calls, and his opportunity cost of 1 telephone call is 1/8 of a financial statement. In contrast, Francis's opportunity cost of 1 financial statement is 5 telephone calls and her opportunity cost of 1 telephone call is 1/5 of a financial statement. For an illustration of the production and opportunity cost per hour refer to chart.Production and Opportunity Cost Per HourPhilFrancisFinancial Statements12Telephone Calls810Opportunity Cost, 1 Financial Statement8 Telephone Calls5 Telephone CallsOpportunity Cost, 1 Telephone Call1/8 Financial Statement 1/5 Financial StatementThe outcome can be compared them by using comparative advantage, which is a person's capability to generate a good at a lower opportunity cost than another person, (O'Sullivan & Sheffrin, 2006). When comparing our two workers, Phil and Francis, a conclusion can be made declaring that Phil has a comparative advantage generating telephone calls because his opportunity cost of phone calls is 1/8 financial statements, compared to 1/5 financial statement per telephone call for Francis. Bea, however, has a comparative advantage generating financial statements because her opportunity cost for telephone calls are 5 compared to 8 telephone calls per financial statement for Phil.ReferencesO'Sullivan, A., & Sheffrin, M. S. (2006). Economics Principles & Tools 4th Edition. Upper Saddle River, NJ: Pearson Prentice Hall.

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