Unit 3 : Opportunity Cost

Opportunity Cost

·         It is the cost of a decision in terms of the best alternative given up to achieve it

·         It is the best alternative forgone

Occurrence of opportunity cost

Ø  Opportunity cost and consumers: Consumers are the buyers and users of goods. They have to decide which product to buy.

Ø  Opportunity cost and workers: Undertaking one job involves an opportunity cost

Ø  Opportunity cost and producers: Produces have to decide what to make

Ø  Opportunity cost and government: Government has to decide its expenditure of tax revenue on various things

Economic goods and Free goods

o   Economic goods are products which require resources to produce it and therefore has an opportunity cost. They are limited in supply.
Example : Carpets, A child’s education.

o   Free goods are products which do not require any resources to make it and so do not have an opportunity cost. They are products for which people do not have to pay for.
Example : Sunshine, Water in the Rivers

Production Possibility Curve

o   PPC aka opportunity cost curve/ production possibility boundary/ production possibility frontier

o   It shows the maximum output of two products and combinations of these products that can be produced with existing resources and technology

This PPC shows that there is a maximum output of DVD players and MP3 Players and the combination of the two products can be produced with existing resources.
that means, at A,B,C, you can have an optimum utility of your resources.

(Image taken from google)