Sunk costs refer to costs that have already been incurred and cannot be recovered, such as money spent on purchasing a software license. Sunk costs should not be considered when making rational decisions. Opportunity cost refers to the value of the next best alternative forgone when a choice is made. It is the cost of an opportunity lost by choosing one alternative over another. Opportunity costs can be explicit, involving direct monetary payments, or implicit, involving the failure to allocate existing resources to their best alternative use.

2. SUNK COST
AND
OPPORTUNITY COST
Rahat Inayat Ali 14CH23
Mehran UET, Jamshoro, Sindh Pakistan.

3. SUNK COST
• In economics and business
decision-making, a sunk cost is a
cost that has already been
incurred and cannot be
recovered. Sunk costs are
sometimes contrasted with
prospective costs, which are
future costs that may be
incurred or changed if an action
is taken.

4. • Both retrospective and prospective costs may be either fixed
(continuous for as long as the business is in operation and
unaffected by output volume) or variable (dependent on
volume) costs. However, many economists consider it a mistake
to classify sunk costs as "fixed" or "variable." For example, if
a firm sinks $1 million on an enterprise software installation,
that cost is "sunk" because it was a one-time expense and
cannot be recovered once spent.

5. • The sunk cost is distinct from
economic loss. For example,
when a new car is purchased, it
can subsequently be resold;
however, it will probably not be
resold for the original purchase
price.

6. • Economists argue that sunk costs are not taken into account
when making rational decisions. In the case of a Yankees
ticket that has already been purchased, the ticket-buyer can
choose between the following two end results if he realizes
that he doesn't like the game:
• Having paid the price of the ticket and having suffered
watching a game that he does not want to see, or;
• Having paid the price of the ticket and having used the time
to do something more fun.
• In either case, the ticket-buyer has paid the price of the
ticket so that part of the decision no longer affects the future.

7. OPPORTUNITY COST
• In microeconomic theory, the
opportunity cost of a choice is
the value of the best alternative
forgone, in a situation in which
a choice needs to be made
between several mutually
exclusive alternatives given
limited resources. Assuming the
best choice is made, it is the
"cost" incurred by not enjoying
the benefit that would be had
by taking the second best choice
available.

8. • The New Oxford American Dictionary defines it as "the loss of
potential gain from other alternatives when one alternative is
chosen". Opportunity cost is a key concept in economics, and
has been described as expressing "the basic relationship
between scarcity and choice".

9. OPPORTUNITY COST IN PRODUCTION
• EXPLICIT COSTS
Explicit costs are opportunity costs that involve direct
monetary payment by producers. The explicit opportunity cost
of the factors of production not already owned by a producer
is the price that the producer has to pay for them.

10. • IMPLICIT COSTS
Implicit costs (also called implied, imputed or notional costs)
are the opportunity costs not reflected in cash outflow but
implied by the failure of the firm to allocate its existing
(owned) resources, or factors of production to the best
alternative use.