Question

Answer the following question.
Explain the meaning of opportunity cost with the help of a production possibility schedule.

Answer 1

The cost of enjoying more of one good in terms of sacrificing the benefit of another good is called opportunity cost of the additional unit of the good.

Let us consider the example of the economy producing two goods- consumer goods and capital goods assuming the level of resources and technology remain the same. The following schedule depicts the different possible combinations of the consumer goods and the capital goods that the economy can produce with its resource endowment and the available technology. This schedule is called a production possibility schedule.

Production Possibilities	Consumer Goods (units)	Capital Goods (units)
A	50	0
B	48	1
C	44	2
D	35	3
E	0	4

From the schedule, we can see that point A shows, if all the resources are utilised in the production of the consumer goods, then 50 units of consumer goods can be produced with zero units of capital goods. On the other hand, point E shows that if all the resources are utilised in the production of capital goods, then 4 units of capital goods can be produced with zero units of consumer goods. Also, consider the movement from point B to point C. It implies that the economy is diverting resources from the production of consumer goods to the production of capital goods. In order to produce one additional unit of capital good, the economy needs to sacrifice four units of consumer goods. Thus, the opportunity cost of producing one additional unit of a capital good is four units of consumer goods.

Answer 2

The cost of enjoying more of one good in terms of sacrificing the benefit of another good is called opportunity cost of the additional unit of the good. It is also called the economic cost.

For example:

Production Possibilities	Consumer Goods (units)	Capital Goods (units)
A	50	0
B	48	1
C	44	2
D	35	3
E	0	4

In the given table, in order to produce one unit of capital goods, the country will have to sacrifice 2 units (50 – 48) of consumer goods. Thus, here, we can say that the opportunity cost of enjoying 1 unit of a capital good is 2 units of consumer goods.

Similarly, for producing 1 more units of capital goods, i.e. 2 units, the country will have to sacrifice 4 units (48 – 44) of consumer goods. Thus, here, we can say that the opportunity cost of enjoying one more unit of capital good is 4 units of consumer goods.