Opportunity Cost

• The concept of opportunity cost occupies a very important place in modern economic analysis.

• Factors of production are scarce in relation to wants.

• When a factor is used in the production of a particular commodity, the society has to forgo other goods which this factor could have produced.

• This gave birth to the notion of opportunity cost in economics.

• Suppose a particular kind of steel is used in manufacturing war-goods, it clearly implies that the society has to give up the amount of utensils that could have been produced with the help of this steel.

•Hence we can say that the opportunity cost of producing war-goods is the amount of utensils forgone.

• Opportunity cost is the cost of the next-best alternative that has been forgone.

• From the meaning of opportunity cost two important points emerge:

The opportunity cost of anything is only the next-best alternative foregone and not any other alternative.

The opportunity cost of a good should be viewed as the next-best alternative good that could be produced with the same value of the factors which are more or less the same.

The concept of opportunity cost can better be explained with the help of an illustration. Suppose a price of land can be used for growing wheat or rice. If the land is used for growing rice, it is not available for growing wheat. Therefore the opportunity cost for rice is the wheat crop foregone. This is illustrated with the help of the following diagram:

• Suppose the farmer, using a piece of land can produce either 50 quintals (ON) of rice or 40 quintals (OM) of wheat.

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