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Opportunity Costs

Understanding Ranch Businesses

The idea of “opportunity costs” is one of the central insights of economics. This is the concept that in order to get more of one thing we must accept less of something else.

Every choice involves opportunity costs. These costs are measured in terms of foregone alternatives. The opportunity cost of using a resource in one way is the benefit foregone by not using it in its best alternative way.

There are opportunity costs associated with anything used in production. The opportunity cost of raw materials purchased for use in production is their purchase price. The opportunity cost for hired factors of production is their rental price, or wages. The opportunity cost of using capital assets is their depreciation. The opportunity cost of money invested is the return that money could have produced in the best alternative investment.

Some of these costs are easily recognized, but others are less obvious and often overlooked. For example, the opportunity cost of grazing livestock on your ranch is the rent you could have earned by allowing another rancher to lease and graze your ranch. When family or friends work on the ranch without compensation, the opportunity cost is the money they could have earned working for another business. With capital invested in livestock, the opportunity cost is the return that capital could have given if invested elsewhere. These are very real costs, and they must be considered when making economic decisions. In order to use your unique set of resources to their highest potential, you must calculate opportunity costs.

Ranch Vision helps ranch managers identify their opportunity costs, providing an accurate economic picture of the ranch business and charting the path to maximum profit.

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