As resources are scarce, societies are always faced with the challenge of making choices. In economics, the concept of opportunity cost is used to measure the cost of the next best alternative foregone when resources are used to produce a certain good or service. This article aims to provide a clear understanding of opportunity cost and how it affects decision-making.
What is Opportunity Cost?
Opportunity cost refers to the cost of the next best alternative foregone when resources are used to produce a certain good or service. In other words, it is the cost of what is given up in order to pursue a certain course of action.
Examples of Opportunity Cost
Opportunity cost can be better understood with examples. Let’s consider the following scenarios:
- Scenario 1: Suppose you are working in a bank at the salary of Rs. 40,000 per month. You receive two more job offers: to work as an executive at Rs. 30,000 per month or to become a journalist at Rs. 35,000 per month. In this scenario, the opportunity cost of working in the bank is the cost of the next best alternative foregone, which is Rs. 35,000.
- Scenario 2: Suppose you have Rs. 20,000 and you want to purchase a computer and an LCD TV. With Rs. 20,000 in hand, you can only buy one of the two. If you decide to purchase a computer, then the opportunity cost of choosing the computer is the foregone satisfaction of owning an LCD TV.
Opportunity Cost and Decision Making
Opportunity cost plays a crucial role in decision making. In order to make the best use of limited resources, decision-makers need to compare the benefits and costs of different alternatives. The opportunity cost of each alternative should be taken into account to determine the best course of action.
| Scenario | Resources | Options | Opportunity Cost |
|---|---|---|---|
| 1 | Labour, Time | Bank job, Executive job, | Rs. 35,000 |
| Journalist job | |||
| 2 | Money | Computer, LCD TV | Foregone satisfaction |
Conclusion of Oppurtunity Cost
In conclusion, opportunity cost is an important concept in economics that measures the cost of the next best alternative foregone when resources are used to produce a certain good or service. Decision-makers need to take into account the opportunity cost of each alternative when making decisions to make the best use of limited resources.