What is opportunity cost? Explain with the help of a numerical example.
Opportunity cost refers to the value of a factor in its next best alternative use. Assuming that resources and technology remain constant, an economy is producing Good X and Good Y. Different combinations of production of Good X and Good Y are given in the production possibilities schedule:
|Production Possibilities||Good X||Good Y||
At the production point II, 1 unit of Good X and 27 units of Good Y are produced. To produce an additional unit of Good X, 3 units of Good Y must be sacrificed.
Here, the opportunity cost is
Opportunitycost from ItoII `(DeltaY)/(DeltaX)="Amount of good Ysacrifed"/"Amount of good Xgained"=(27-30)/(2-1)=-3`
Thus, the opportunity cost of getting an additional unit of Good X is 3 units of Good Y.