Reference no: EM132129923

Question: During the decision-making process, individuals' are faced with a choice and subsequently forced to forgo other alternatives as a result of resource constraints. Whether the resource is time, money, or any other resource, a decision encompasses an opportunity cost, which is the value of the next-highest-valued alternative. In terms of improving decision-making, incorporating an analysis of the opportunity costs that arises from the difference in outcomes, as a result of choosing one alternative over the other(s), can enhance the ability to allocate resource more efficiently. Considering and evaluating these opportunity costs can protect the potential downside of a decision.

For example, in terms of a financial constraint, if a new graduate chooses to spend $1,500 on a fairly large flat screen television, the costs of the television go far beyond the retail price of $1,500. The alternatives could range from placing that $1,500 in an indexing fund or any other investment vehicle, potentially using those funds as a part of a down payment to move out of the parent's basement, or any other alternative. Therefore, the opportunity cost is forgoing those alternatives and the inherent benefits that may arise from investing or making a down payment, for example. As you can see, evaluating the opportunity costs of a decision can improve decision-making, as the true cost of a decision is seldom the presented price.

After evaluating the opportunity costs as a result of a financial constraint and a decision at hand, one must also consider the opportunity cost of sitting on the couch watching the television. Thus, considering these costs may steer the decision-maker towards are most productive alternative such as starting to invest in an indexing fund. This is why economics and economic theory can improve decision-making, as it aims to utilize scarce resources in an efficient manner.

What do you think about the given example? (In 100 - 150 words)