In this note, we are going to discuss about Opportunity Cost, Rationality Cost, and Benefits. Welcome to Poly Notes Hub, a leading destination for Diploma Engineering Notes for Engineering Students.
Author Name: Arun Paul.
Opportunity Cost
When resources (such as time, money, or effort) are decided to be allocated towards a specific choice, the value of the next best option that must be given up is referred to. Put otherwise, it is the sacrifice you make in favor of another option. An instance of this cost would be the pleasure and relaxation you might have derived from viewing a movie, but instead, you choose to spend the evening preparing for a test.
The formula for calculating opportunity cost is:
Opportunity Cost = Value of Chosen Option − Value of Next Best Alternative
This formula represents the difference between the benefit gained from the chosen option and the benefit that would have been gained from the next best alternative.
Rationality Costs
Though it’s not often used in economics or decision theory, this phrase could be used to describe the expenses incurred in rational decision-making. When making a rational decision, one must consider the advantages and disadvantages of several possibilities and select the one that would maximise utility or best serve a particular purpose. Costs associated with rationality could include the time and energy needed to obtain data, weigh options, and come to a decision. It may also refer to the emotional costs—such as tension or anxiety—that come with making decisions in certain situations.
There isn’t a single formula for this cost, as they can vary depending on the decision-making process and context.
Benefits
The advantages or favourable results that arise from a specific choice or course of action are known as benefits. These can include both concrete advantages like better health or money as well as intangible advantages like greater happiness or satisfaction. It is crucial to weigh the advantages and disadvantages of a decision when assessing whether it is the best or most desirable option.
For example, in financial decision-making, it can be calculated as the difference between revenues or returns and costs or investments:
Benefits = Revenues or Returns − Costs or Investments