Opportunity Cost in Economics

Topic Covered in this page

As resources are scarce, the society is always forced to make choices. To produce more of one good, a certain amount of other goods , which could have been produced,  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 forego (miss out)  , when they choose one alternative over another. Opportunity Cost is the next best alternative, which is foregone, when a particular alternative is chosen.

Some Examples on Opportunity Cost

  1. 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.
  2. Suppose, you have Rs. 20,000 and you want to purchase a laptop and an LCD TV. However,  with only Rs. 20,000 in hand you cannot buy both as their total cost is more than Rs. 20,000. 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.

What is the opportunity cost of that good

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.

Definition of Marginal Opportunity Cost 

Marginal Opportunity Cost refers to the number of units of a commodity sacrificed to gain one additional unit of another commodity. In numerical terms, Marginal Opportunity Cost is the ratio of  loss of output of the good foregone to the gain of output of goods chosen.

MOC=Δ loss of output of good Y / Δ gain of output of good X

Suppose for a manufacturing company, production of 4 consumer goods requires the company to sacrifice production of 1 capital goods, then this 1 capital goods, will be the marginal opportunity cost of producing the 4 additional consumer good.

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