Introduction
While making decisions is a life-long activity that one must partake on a daily bases, people often cite difficulties in making trivial to life-changing decisions. In most straightforward sense decision making involves choosing between two or more course of action in any given scenario. Proper decision making not only requires that an individual acquires knowledge and information that would help them choose among alternatives but also analytical skills for weighing the pros and cons of the choices (Chai, Liu & Ngai, 2013) . Among the most essential skills that an individual should possess is the ability to weigh the opportunity cost of taking one option at the expense of others. By understanding opportunity cost, an individual or businesses can make informed decisions when choosing among competing alternatives.
Decision Making
In making decisions, a decision maker must identify and choose among alternatives what they believe to be the best course of action. Defined, decision making is a cognitive process that involves the identification and weighing between alternative courses of action and selection of the best based on knowledge, preferences, believes and values of the decision maker ( Zimmerman & Yahya-Zadeh, 2011) . The decision maker can be an individual, business entity, government or any other group of people that are involved in some form of activity. Decision making can be seen as a problem-solving process that result in an optimal or satisfactory solution. It consists of the use of both tacit and explicit knowledge and beliefs to fill the gaps in a complicated process.
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While decision making also depends on other factors, the major part of the process mainly involves an analysis of a set of alternatives through an evaluative criterion ( Cowen & Tabarrok, 2015) . Several approaches can be used to approach the process of choosing among competing options. However, if the decisions are to reflect an understanding of the possible benefits of all the alternative courses of actions, a proper analysis of opportunity cost should be conducted.
Opportunity Cost
Opportunity cost includes the potential benefits an individual, business or any other party misses by choosing one alternative among a number. By definition, the opportunity cost is the value foregone by choosing to take a particular course of action. It is the returns from the most valuable choice that a decision maker left out. The cost incurred from not enjoying the benefits of the choice is the loss of potential gain from the alternative (Hall & Lieberman, 2012) . As a microeconomic concept, opportunity costs are used to explain the connection between scarcity and choice.
Opportunity cost is the concept that is used to ensure that scarce resources are applied to the best with efficiency to bring about the most benefit to a business entity. However, it is noteworthy that opportunity cost is not only valued based on monetary or financial costs. Other benefits such as pleasure and enjoyment that provide utility are also part of opportunity cost (Chai, Liu & Ngai, 2013) . Consequently, opportunity cost must be understood as the overall value that includes quantifiable and non-quantifiable results that come from choosing among competing priorities.
Opportunity cost applies when alternatives are mutually exclusive and must be based on the second best alternative based on a set of values. Value considers not only the funds tied to the alternative course of action but also other factors as business interests. Opportunity cost can also be in terms of time, earning, and relationship (Hall & Lieberman, 2012) . For example, when a business chooses a cheap distributor for their product who is not reliable and leaves after some time, it foregoes a relationship with a quality distributor who would supply goods for a long time and create a rapport that enhances the quality of services offered by the business. The opportunity cost, therefore, must go beyond the monetary value of foregone alternatives if it is to reflect the consequences.
In business, the opportunity cost is elusive and hard to understand as it is not included in financial reports. Even by definition, the opportunity cost is unseen making is possible to missed and also overlooked by decision makers. However, understanding the value of lost opportunity would allow businesses to make more informed decisions that would result in the growth of a market. According to Hall & Lieberman, (2012) opportunity cost is calculated as:
Opportunity Cost = Return on the best-foregone option – Return of the choice made
Return on investment is the main criteria used in business decision making that involves opportunity cost. Unfortunately, the opportunity cost is mainly realized after the results of the choices made are understood. For example, if a business opts to invest in the stock market instead of reinvesting back by buying new equipment, the opportunity cost will be realized at the end of the investment period when returns can be determined. However, proper determination of opportunity value plays a vital role in other factors such as the determination of business capital structure.
The use of opportunity cost to determine businesses’ capital structure is among the most important roles that understanding the concept can significantly aid in decision making. Capital structure is the way a firm finances its operations and growth through the use of different sources of funds. Notably, the capital structure is based on debt and equity. In analyzing capital structure, an organization's short and long term debt is considered (Newcomer et al., 2015) . While both debt and equity have an expense requirement when the business comes to compensate lenders and shareholders due to investment risk, they also have an innate opportunity cost. Funds used in loan repayment are not used for bond or a stock investment that is a potential source of income. Therefore, the business must determine whether using debt to expand can generate more profits than investments. By use of opportunity cost, an organization can decide on the most appropriate debt-to-equity ratio that would bring most returns to investors.
While opportunity cost is an excellent tool for decision making, it is a forward-looking calculation making it hard to determine the actual rate of return from competing for alternatives effectively. Opportunity cost uses the current value of expected results in the market in calculating foregone profits (Hall & Lieberman, 2012) . Consequently, the value may change between the time of decision making and the actual date of returns. For example, if a company decides to invest in stock instead of new equipment, the cost of stock may fail that could result in possible loss of money by the company. This means that in calculating for opportunity cost, the company must consider not only the immediate but also long-term value generated by the accessible alternatives. For example, the value of purchasing new equipment may be long term while that of investing in stock may be short term.
Explicit and Implicit Cost
Another important concept that one ought to understand while making decisions based on analysis of opportunity cost is implicit and explicit costs. The evaluation of opportunity cost require an understanding of direct and indirect value an entity gets from the alternatives. In business, the exact cost is the immediate monetary payment that comes from indulging in an activity (Kurzban et al., 2013) . This includes the direct monetary payments acquired from the preferred alternative. The exact cost is therefore easy to understand and make use of in determining the choice to take among competing options. On the other hand, the explicit cost is not easy to decide on and require a higher evaluation of popular alternatives with a qualitative approach.
Implicit costs are imputed, implied and notional and do not reflect in the cash flow statements of an organization. Inherent prices are opportunity costs that are indicated by a decision maker's decision to allocate their resources to the most preferred alternative (Kurzban et al., 2013) . These include such costs as those involved in not using machinery and other factors of production. Implicit cost is often hard to value as it may also include non-measurable factors. For example, if an organization opts to recruit a hardworking employee with loose morals at the expense of one who can contribute to its culture, the cost foregone is qualitative and not easy to determine. However, for effective decision making, implicit opportunity cost and their importance must also be considered.
Conclusion
The understanding of opportunity cost allows people to effectively make decisions based on careful consideration of the possible returns from all available options. By considering the potential benefits of the most valuable alternative among those present, one could make an informed decision. The value tied on a replacement could be quantified such as in terms of monetary value or non-quantifiable like in the case of quality of the relationship. In business, the primary consideration while determining opportunity cost is monetary value. By the use of return on investment, an organization can quickly identify the capital structure they will use in their operations. With the apparent difficulty in determining the rate of return and the presence of implicit costs, it is at times hard to make predictions on value created from alternative courses of actions. Consequently, the business must make use of both implicit and explicit costs and long term and short term considerations when making choices among competing for alternatives to realize its full potential.
References
Chai, J., Liu, J. N., & Ngai, E. W. (2013). Application of decision-making techniques in supplier selection: A systematic review of the literature. Expert systems with applications , 40 (10), 3872-3885.
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics . Macmillan International Higher Education.
Hall, R. E., & Lieberman, M. (2012). Microeconomics: Principles and applications . Cengage Learning.
Kurzban, R., Duckworth, A., Kable, J. W., & Myers, J. (2013). An opportunity cost model of individual effort and task performance. Behavioral and Brain Sciences , 36 (6), 661-679.
Newcomer, K. E., Hatry, H. P., & Wholey, J. S. (2015). Cost-effectiveness and cost-benefit analysis. Handbook of practical program evaluation , 636.
Zimmerman, J. L., & Yahya-Zadeh, M. (2011). Accounting for decision making and control. Issues in Accounting Education , 26 (1), 258-259.
