Opportunity Cost

Choice: It is selection between two or more commodities (any marketable item produced to satisfy wants or needs). People cannot find enough resources to satisfy all their wants and need, so they must choose most urgent wants or the commodity that gives them the maximum satisfaction. 

Q) Why is choice necessary?

Choices are necessary because resources are limited while the human wants are unlimited. One has to make the best choice between two things to get satisfaction due to lack of abundant resources.

Q) What might be the choice from the following?

a.      Maria wants build a house of her own but due to less money has to rent a house.

b.      Shazia has to buy an apple cake from the shop as pineapple cake was unavailable.

c.       Poor child has to work but he wants to study.

Opportunity Cost: opportunity cost is the next best alternative forgone (Sacrificed).

 

It is the real cost of choosing something. When we make a choice we have to give up something or forgo something. The forgone thing is opportunity cost. 

Example: Ahmed has just enough money to buy a football or volleyball. He chooses to buy football hence his choice is football. He gave up or sacrificed volleyball hence his opportunity cost is the volleyball.

Example: If we assume that land can either be used to produce corn, or it can be used for raising cattle to produce beef, but it cannot be used to do both at the same time, we have two choices and we must make a decision. Our decision will decide choice and opportunity cost. The thing we choose is choice and the thing we forgo is opportunity cost.

Opportunity cost is not how much money we spend on goods, but other goods and services we could have bought with that money. Therefore we cannot consider money as opportunity cost for the product we buy, but the other product which we can buy with the same money will be opportunity cost.

Opportunity cost should also involve other relevant costs like the value of time spend and the value of the opportunities we forgo.

Q) if there were enough resources to produce everything everybody wanted, would there be any opportunity cost? Explain your answer.

Q) What might be the better opportunity cost from the following?

d.      Maria has limited money to buy orange or apple and she purchase apple

e.       Shazia decides to study Economics at a university. 

f.        A school is built on farm land

g.      A woman has a TV set which cost her $800 two years ago. A new set would cost her $1000 and she could sell her TV set for $450. What is opportunity cost of keeping the old TV