As resources are scarce, the society is always forced to make choices. To produce more of one good, a certain amount of other goods has to be sacrificed. The true cost of using economic resources in any given project is the loss of the alternative output which might have been produced. Let us learn what is meant by opportunity cost in economics.
What is Opportunity Cost in Economics?
Opportunity Costs are the benefits that an individual, investor or business misses out on when they choose one alternative over another. Opportunity Cost is the next best alternative foregone. If a certain amount of land, labour and capital is used to build a factory, then the opportunity cost might be the houses which these resources could have produced.
Suppose, you have Rs. 20,000 ad you want to purchase a laptop and a LCD TV. But with only Rs. 20,000 in hand you cannot buy both. If you decide to buy the laptop, then the opportunity cost of choosing the laptop is the cost of the foregone satisfaction from the LCD TV and vice versa.
This demonstrates a fundamental economic condition that as our resources are limited, we are always forced to make choices between alternate commodities. The amount of other goods and services that must be sacrificed to obtain more of any one good is called the opportunity cost of that good. Since, by definition they are unseen, opportunity costs can be easily overlooked if one is not careful.
Marginal Opportunity Cost
Marginal Opportunity Cost refers to the number of units of a commodity sacrificed to gain one additional unit of another commodity. Because by definition they are unseen, opportunity costs can be easily overlooked if one is not careful. In numerical terms, Marginal Opportunity Cost is the ratio of the Because by definition they are unseen, opportunity costs can be easily overlooked if one is not careful.
MOC=Δ loss of output of good Y / Δ gain of output of good X
Suppose for a manufacturing company, production of 1 consumer good requires the company to sacrifice production of 4 capital goods, then this 4 capital goods will be the marginal opportunity cost of producing an additional consumer good.