Introduction:
Assignment 1.3 dives into the role of definition in technical writing. Definitions play a critical role, especially in a professional setting, as they allow people to gain insight, knowledge, and awareness of a particular field. I will provide three definitions for this assignment: parenthetical, sentence, and expanded. My complex term will be “opportunity cost,” used in economics, finance, and accounting.
Complex Term: Opportunity Cost
Target Audience: Target Audience: Individuals interested in finance, economics, or accounting. Opportunity cost will be seen in 1st, 2nd, 3rd, and 4th-year economics, finance, and accounting textbooks.
Parenthetical definition:
Opportunity cost is (evaluation of cost forgone) the benefits lost from an individual deciding on an alternative decision over another.
Sentence definition:
An individual incuring a cost from engaging in one activity but forgoing the potential benefits from the alternative path. In other words, it describes the consequences of giving up an opportunity to partake in a different option. This term is frequently used in economics, finance, and accounting to evaluate choices.
Expanded definition:
Operating Principle: Determining the cost of making a decision by comparing it to its alternative.
History: Friedrich von Wieser was the first economics professor to publish research that included “opportunity cost” in 1914 (Baye, 2007). The purpose of Wiesser’s inclusion of opportunity cost was to understand better what it means to make a decision and to rationalize it through a quantitative lens. Thus, the idea of opportunity cost was created so that people can make the most optimal decisions (Buchanan, 2008).
Example/Application: Opportunity cost has now been widely adopted in economics, finance, and accounting to make key financial decisions (Henderson, 2011). For example, opportunity cost is evaluated to determine which investments in bonds will have the greatest return on investments, or from a macro perspective, economists suggesting to raise or lower taxes. Furthermore, opportunity cost can also be applied to everyday life. For instance, when we decide whether to commute through transit or to drive, we can calculate the opportunity cost of our time spent on transit that could have been saved by driving: total time spent on transit subtracted by total time spent diving equals the opportunity cost of that time spent doing something else.
Equation: Opportunity Cost = Return On Best Forgone Option – Return on Chosen Option
Example #1: When deciding which bonds to invest in, an investor has to decide the return on investment between the available bonds. An investor will evaluate the return on each bond with the given information (i.e., yield to maturity, interest rates, original bond price, etc.) and also include the loss of opportunity from choosing one bond over another. A decision where the opportunity cost is the lowest would be the decision the investor would make to yield the largest returns.
Example #2: When we decide whether to commute through transit or to drive, we can calculate the opportunity cost of our time spent on transit that could have been saved by driving: total time spent on transit subtracted by total time spent diving equals the opportunity cost of that time spent doing something else.
Visual:
(Deciding which option to choose from: either A or B. The opportunity cost can be determined by the opportunity lost from choosing one option over another)
Citations:
Baye, M. R. (2007). Managerial economics and business strategy (6th ed.). New York: McGraw Hill.
Buchanan, J. M. (2008). Opportunity cost. In: S. N. Durlauf & L. E. Blume (Eds.), The new Palgrave dictionary of economics (2nd ed.). Palgrave Macmillan. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 09 June 2013, doi:10.1057/9780230226203.1222
Henderson, D. R. (2011). Opportunity cost. In Henderson, D. R. (Eds.), The concise encyclopedia of economics (pp. 300). Indianapolis, IN: Liberty Fund.
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