Opportunity cost is one of the major factors affecting savings decision. Opportunity cost refers to the alternative cost that should be waived while consuming certain product or service. In other words it can also be said that the opportunity cost is actually a benefit that is enjoyed by the purchaser over certain alternative action. Generally the opportunity cost is expressed as the relative price of one choice to another. The concept of opportunity cost affects the decision of savings of an individual gravely. Before going for purchasing a good or service the individual thinks about the opportunity cost of that particular purchase and hence decides on saving.
Another important factor that affects the savings decision is the theory of diminishing returns. Also known as the diminishing marginal returns, the diminishing return says that after a certain point, the additional variable input unit does not yield the same but rather yields less additional output. In other way it can also be said that creating a single unit actually costs more variable inputs. This theory affects the decision making concept of individual and says that after a certain point the consumer prefers to save rather than going for more consumption.
Economies of scale refers to a process of production where, if there is an increase in the scale of the firm, the long run average cost is decreased for each unit. The two of the most popular ways of achieving the economies of scale are - low fixed cost and decreasing marginal cost and constant marginal cost. This 'economies of scale' theory influences a firm's decision to save or invest.
