OPPORTUNITY COST AND MARGINAL OPPORTUNITY COST

 Learning Contents:                                                            

·         Understanding  Opportunity Cost

·         Opportunity cost and Different Decisions

·         Understanding Marginal Opportunity Cost

 

Opportunity Cost:  

We find the concept of opportunity cost everywhere. If we spend our time reading books, we cannot spend it on entertainment. If we miss our economics class (not recommended, by the way), the opportunity cost is the learning we miss. Spending your time on gossips would take you away from the goals you set for yourself. If you choose to marry one person, you give up the opportunity to marry anyone else. In short, the opportunity cost is all around us.

Since resources are limited, we cannot fulfill all our wants so we make choice among various alternatives rationally. The alternatives which are available are nothing but only the opportunities available. As discussed previously that economics is the study of making choices in situations of scarcity.

Let’s take an example a consumer has the opportunity whether to buy Good A or Good B. Similarly, a producer has the opportunity whether to produce Good A or Good B. In the same way, a farmer with a given piece of land has the opportunity either to grow wheat or rice. Thus, the selection is just as we have limited resources, and moreover, with the given amount of resources, we cannot produce the two goods simultaneously. It means if we want to avail of one opportunity then we have to forgo or decline the other opportunity. It is the cost of availing opportunity in terms of loss of the other opportunity.

Simply, the term opportunity cost indicates what must be given up to obtain something that’s desired or the sacrifice made in order to gain something. In short, the opportunity cost is the value of the next best alternative.

Opportunity Cost and Different Decisions

1. Opportunity cost and Individual decisions

Opportunity cost comes into play with individual decisions. An individual decision can be the decision of a consumer, producer, supplier, or marketer which alters their behavior of purchase, produce, supply, or sell respectively. Decisions are taken after considering cost, time, money, or other resources available. For e.g. A producer will undertake the production of clothes at the loss of producing shoes since the resources available are limited. Similarly, a consumer cannot buy all the goods with a limited budget and time.

2. Opportunity cost and Societal decisions

Opportunity cost also comes into play with societal decisions. Every government strives to make decisions for the welfare of its society members. Universal health care would be nice, but the opportunity cost of such a decision would be less housing, environmental protection, or national defense. If the government is funded with unlimited resources, there is no question of making choices over various national priorities.

 

Marginal Opportunity Cost:

The term ‘Marginal’ means additional or one more unit. The marginal opportunity cost refers to the amount of output sacrificed or lost for Good- Y in order to produce one more or additional unit of Good- X.

We can also say that it the ratio of additional loss of output of Good -Y for an additional gain of output of Good-X, because some resources are shifted from the production of Good-Y to Good-X.

Understanding MOC (Marginal Opportunity Cost) with the help of the following example:

A country produces two goods: Oranges and Peach. Its production possibilities are shown in the following table. Calculate the marginal opportunity cost of producing more peaches in place of oranges at various combinations.

Oranges(kg)	100	90	70	40	10	0
Peach(kg)	0	25	50	75	85	87

Marginal Opportunity Cost of producing more peaches

        = Opportunity cost of producing an additional unit of peach when some resources are shifted from the production of oranges to the production of peaches.

  Table 1 representing the calculation of Marginal Opportunity Cost

Oranges	Peaches	Marginal Opportunity Cost
100	0	----
90	25	10/25=0.4
70	50	20/25=0.8
40	75	30/25=1.2
10	85	30/10=3
0	87	10/2=5

Explanation:

In the above diagram 1, we plot the goods sacrificed (oranges) on Y-axis and goods gained (peach) on the X-axis. It is clear from the diagram that if we want to increase the production of peach we have to sacrifice the production of oranges as resources are limited. The curve we have drawn by joining the points is downward sloping and concave to the origin. Marginal opportunity is rising as it indicates more of the orange are sacrificed in order to produce more peach.

Multiple Choice Questions:

1. The opportunity cost of 100 kg of mango produced on land which can also produce 80 tonnes of wheat is:

a. 100 kg of wheat

b. 80 tonnes of wheat

c. 7,000 tonnes of wheat

d. None of these

2.  The opportunity cost of any action is?

       a. all the possible alternatives forgone

       b. the  next best alternative forgone

       c. the time required but not the monetary cost

       d. the monetary cost but not the time required.

3. A teacher can do three jobs—teaching, tuition work, and writing books. He gets`1 lakh from teaching, 1.5 lakh from tuition work, and ` 3 lakh from the royalty of books. He is presently writing books. What is the opportunity cost of writing books?

    a. 3 Lakh

    b. 1.5Lakh

    c. 1 Lakh

    d. None of these

4. The economic analysis expects the consumer to behave in a manner which is:

    a. Rational

    b. Irrational

    c. Emotional

    d. Indifferent

5. William only buys coffee, which costs him ₹ 2 per cup, and sweaters, which cost ₹ 20 each. What is the opportunity cost of one sweater?

    a. 0.1 cups of coffee

    b. 1 cup of coffee

    c. 10 cups of coffee

    d. 20 cups of coffee

Answer Key

1. b 2. b 3. b 4.a 5.a

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