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Home » Economics Homework Help » Microeconomics Help » Opportunity Cost
Opportunity Cost
The concept of opportunity cost occupies a very important place in modern economic analysis. The opportunity cost of any good is the next best alternative goods that is sacrificed. The factors which are used for the manufacture of a car may also be used for the produiotn of an equipment of the army. Therefore the opportunity cost of production of a car is the output of the army equipment foregone or sacrificed which could have been produced with the same amount of factors that have gone into the making of a car to take another example a farmer who is producing wheat can also produce potatoes with the same factors. Therefore the opportunity cost of a quintal of wheat is the amount of output of potatoes given up. Professor Bonham defines the opportunity costs thus the opportunity cost of anything is the next best alternative that could be produced instead by the same factors or by a equivalent group of factors costing the same amount of money?

Two points be noted in the above definition opportunity cost. First the opportunity cost of any ting is only the next- best alternative forgone. That is say the opportunity cost of producing a god is not any other alternative good that could be produced with the same factors; it is only the most valuable other good which the same factors could produce. Second point worth noting in the above definition is the addition of the qualification or by an equivalent group of factors costing the same amount of money the need for the addition fo this qualification arises because all the factors used in the production of one good may not be the same as are required for the production of the next wheat seed etc for the production of wheat may use the same land the same workers the same water the same water the same fertilizers for the production of potatoes but a different type of seed will be needed. Likewise a manufacturing firm may shift from the production of one product to another with any changes in plant and equipment ro its workers but it will require different types of raw materials. In such cases therefore the opportunity cost of a good should be viewed as the next best alternative goods that could be produce with the same value of the factors which are more or less the same. The concept of opportunity cost is very fundamental to economics Robbins famous definition of economics goes in terms of the scarcity of resources and their ability to be put into various uses. If the production of one good is increased then the resources have to be withdrawn from the production fo other goods. Thus when the resources are fully employed then more of one good could be produced at the cost of producing less of the other. If 100 units more of goods X are produced by withdrawing resource form the industry producing goods Y then the opportunity costs of producing additional hundred units of X is the amount of good Y sacrificed.

The alternative or opportunity cost of a good can be given a money value. In order to produce a good the producer has to employ various factor of production and have to pay them sufficient prices to get their services. These factors have alternative uses. The factor must be paid at least the price they are able to obtain in the next best alternative uses. The total alternative earnings of the various factors employed in the produiotn of a good will constitute the opportunity cost of the good.

A significant fact worth mentioning is that relative prices of goods tend to reflect their opportunity costs. The resources will remain employed in the production of a particular good when they are being paid at least the money rewards that are sufficient to induce them to stay in the industry equal to the value they are able to obtain and create elsewhere. In other words a collection of factors employed in the production of a good must be paid equal to their opportunity cost the greater the opportunity cost of a collection of factors used in the production of a goods the greater must be the price of the good. Thus if the same collection of factors can produce either one tractor or 2 scooters then the price of one tractor will be twice that of one scooter.

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