Every resource needed for a decision option has an opportunity cost
It is defined by the next
best use of that resource
OC of a resource that has no other use is ZERO.
OC of a resource that is constantly being replenished is its replacement cost. With stable prices,
historical cost equals OC.
How to measure
Fixed vs variable costs
Fixed costs do not vary with volume of activity. A measure of the volume of activity depends on
the decision context
it can be # of units, #of customers, Labor hours, labor cost, # of miles etc
as the case may be.
Variable costs vary linearly with volume of activity. Linearity is a practical assumption.
As you will see, firms typically “unitize” (spread) fixed costs.
Fixed cost per unit of volume
decreases as volume increases.
Variable cost per unit of volume always stays constant assuming that variable costs are linear in