Explain one opportunity cost of a private limited company deciding to award a pay increase to its employees.


When a private limited company decides to increase employees pay, the company forgoes the opportunity of using the money to expand its business. Also the company forgoes the opportunity to use the money to carry out improvements in the company.

Opportunity cost is the cost of the next best option an economic agent forgoes when she chooses one option over other options. For example, if a college student decides to study instead of working, her opportunity cost is the amount she would have earned while working.

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Explanation:

Opportunity costs represent the sacrificed benefits in a decision. when choosing between alternatives, people can only enjoy the benefits from the chosen option. The advantages from the other alternatives not selected are foregone. The missed benefits from the options not selected are the opportunity costs.

Awarding employees with a pay increase will cost the private limited company money. The company could have spent that money in different other ways. For example, instead of awarding a pay increase, the company could have invested in new modern machinery, invested in shares of another company, or opened another branch. Assuming buying shares was the next best alternative to awarding pay rise, the missed dividends, and capital gains from shares not bought is the opportunity cost.

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