Oppurtunity Cost

Individuals as well as societies have to make choices about which wants and needs should be satisfied in present, and which ones should be satisfied in the future. The sacrifice involved in these choices is called Opportunity Cost in economics. Opportunity cost or real cost or economics cost refers to the cost of the alternative forgone by present consumption or production decisions. Since consumers cannot have everything they want, they must choose between competing alternatives. This process of making choices in known, as economising or optimising consumption subject to a budget or income constraint. In economising, individual must weigh up to the benefits of having more of one good or service against the cost of having less of another good and service. Societies also face similar choices in the way that they allocate limited resources or income. Opportunity cost may be expressed in terms of money. For example, if you had $ 5 and spent it on food instead of drinks the opportunity cost is the $ 5 worth of drinks forgone. Opportunity can also be expressed in terms of time, doing an assignment for 2 hours may be represented as an opportunity cost of 2 hours of playing sport or watching a movie or DVD. Opportunity cost can also be applied to the decisions of the firms and government.

A government on behalf of the community, which elected it, may face the choice of building a new school or a new hospital versus upgrading a road or increasing expenditure on police or ambulance services. Decisions like these are often solved through a combination of factors: community preferences, the government’s budget constraint, political debate and project specific cost and benefits. Therefore the opportunity cost is implicit in all economic decision making, whether by individual consumer, business firms or government. Another example, when there is high unemployment the government may adopt the policy of lowering interest rates and increasing its spending. The government will be hoping that these actions will encourage individuals and businesses to increase their spending. By doing this, individuals and businesses will stimulate the demand for goods and services and this should result in reduced unemployment.

Opportunity cost is best illustrated by a production possibility frontier or curve. An economy’s production possibility frontier