Activity 1(h)

Activity 1h: Business decision making and opportunity cost

1.    Opportunity cost is defined as the value of the next best alternative foregone. In this case, the opportunity cost is the next-best use of the entrepreneur’s time.

2.    Explicit costs are verifiable with receipts and are paid to suppliers, employees etc. In contrast implicit costs consider the opportunity costs. In some cases the implicit costs may need to be estimated. For example, if a business owns its own building then the explicit costs might be low. A consideration of the implicit costs would consider the potential lost income that could be gained from renting it out.

3.    Economic profit is determined by looking at the accounting profit (revenue minus explicit costs) but then deducting the implicit costs (considering the opportunity costs).

4.    Steps:

First calculate the accounting profit (revenue minus explicit expenses)

Revenue                           1,250

Expenses                             780

Net Profit                             470

Minus opportunity cost          520

Net economic loss                (50) 


5.    The answer to this question will depend on the opinion of the student. If it was a purely economic decision then the business owner may be better off working in the restaurant and renting the lawnmower. People, however, make decisions of a range of other factors that maximise their utility including enjoyment associated with the activity, interactions with others and the ability to work outdoor.