Introduction
Opportunity cost can be defined as the cost related to any activity calculated in respect of the worth of the subsequent alternative given up. The opportunity cost, associated with the second top choice, is a sacrifice that a group or someone makes, who has selected one of the choices among many. Opportunity cost, a "cost" of the scarified goods or commodity after a choice is made. Opportunity cost in economics is an important concept, and has also been explained as "the fundamental relationship between choice and scarcity ". The idea of the opportunity cost in business plays a vital role in order to ensure that the scarce resources available are efficiently, effectively and timely be used. There are number of examples of opportunity cost. Therefore, opportunity costs not at all are limited to the financial or monetary costs: the actual cost of the output which is scarified, the time lost, satisfaction or other advantage that gives utility to someone.
Opportunity costs in production
Opportunity costs are very much significant in while making the decision regarding production of the product. For instance, if the employees of an organization in a farm produce two million pounds of barley or three million pounds wheat, opportunity cost is then producing extra one million pound barley is two pounds wheat sacrificed. This is crucial and the organizations have to concentrate on this fact before making any decision before production. The organization should evaluate the involved sacrifices in any case .
Explicit costs
Explicit costs, on one hand, opportunity costs which engage the direct financial payment by the producers. For example, if an organization uses $100 on the consumption of electrical power, in this case opportunity cost may be defined as $100. In this case the organization has given up $100, and this $100 could also be spent on some other production factors.
Implicit costs
Implicit costs, on the other hand, in the production factors are one which a manufacturer owns already. These costs are somewhat equivalent to the factors which could be earned for the organization by using the alternative spending, either worked out within the organization or rented out to the external firms. For instance, if an organization spends $400 monthly for all the year in respect of warehouse rent which holds the product for 6 months for every year. The organization could also rent out that warehouse for the six months unutilized rent, and this is the cost which can be spend on other production factors.
Non-monetary opportunity costs
Opportunity costs not always are the monetary units. These are also not able to create a good in excess of another. In some of the cases, opportunity cost may also be unidentified, or generate a number of series of costs known as sub opportunity. For instance, a person could select not to inquire one girl out in a date, attempting it to create her more concerned by playing rigid to get, therefore, an opportunity cost can be that both get totally ignored, and that could lead towards some opportunity costs .
Evaluation
This point has to be noted regarding opportunity cost within an organization is not at all the total of the alternatives available in organization when these alternatives, in turn, are mutually restricted to one another. It can be evaluated as the worth of next top usage. If it has been decided in a city to build a hospital on an area or land which is vacant. But on the same time there is an opportunity to build on this vacant land a sports center, or there may be a chance to decide to build one parking lot on that vacant land, or the third opportunity is that to sell this land and get money which can be utilized in other project. The use of the vacant land in any of these three purposes would prevent the option to put into practice any other factor.
Criticism
If the costs of opportunities are critically evaluated than it is observed that many of the opportunities are very difficult to be compared. Opportunity cost is considered a fundamental establishment of value’s marginal theory and also theories of money and time. In some of the cases, it is possible to encompass many of the things after making number of choices; this can be explained as; when the economy of a county is within the production opportunity frontier of its own. This is quite unusual, as for as microeconomic models of an organization or firm are concerned, this is because of the fact that the individuals are supposed to maximize the utility, yet it is one of the features regarding Keynesian macroeconomics. Conditions like these, when investment on one item is presumed to be equivalent to some, opportunity cost concept is very less useful in these circumstances .
Law of Increasing Opportunity Cost:
As for as the relationship between the opportunity cost and foregone production is concerned; a direct relationship between the two can be observed. It means that the increase in the opportunity cost reveals the increase in the forgone production’s value, hence the foregone production’s value increases as that of increase in the amount of produced commodity. This is one of the basic economic principal which can be visualized in the schedule of production possibilities and can also be evaluated the by the cure in production possibility graph, generating a unique convex shape .
Production possibilities, analyzes the substitute combinations of the two commodities that a business entity can produce under the available technology and resources, reveals the cost of opportunity of production. Particularly, if we analyze the curve the shape of production possibilities, is an opportunity cost regarding commodities measured on horizontal axis. The direct relationship depicts here that by increasing opportunity cost, the production also increases .
Production Possibilities:
The usage of available resources in an organization is one of the major and fundamental rules of business to enhance the production. In this context, the organization always recommends the combination of available resources the firm has. This is a well-known fact that there is always the scarcity of resources and the best use of these scarce resources is expertise of the organization has. Therefore the possibilities of production of the economy are quite limited due to limited resources. The fundamental production presentation possibilities generally take the appearance of schedule related to production possibilities, which is presented in a table, illustrating a separate number of bundles of production. The advanced presentation in this context is also through curve of production possibilities shown in the graph.
Production Possibilities Curve:
It is a curve which illustrates the possibilities of the production for an economy. A cure known as PPC production possibilities curve indicated the bare minimum level of production of an economy or a business entity that can be made in a particular time. This is called a frontier or boundary of production capabilities of the economy. This is the reason that it also very habitually known as PPF production possibilities frontier. As a boundary or limit, the maximum possibility of production mentioned against the existing technology and resources. Producing as per the curve reveals that all the available resources of the economy have fully been utilized; on the other hand producing on the lower side of the curve reveals that the resources of the firm have not been properly utilized or unemployed.
In order to demonstrate the relationship between the shape of curve of production possibilities and opportunity cost, these are three alternatives which can help to understand the correlation between the two.
- Convex: The Increasing Cost: This is a standard curve and is called curve of convex production possibilities. This curve reflects the best of the economy. It has been observed that this curve has frequently been used in economics’ study.
- Straight: The Constant Cost: This curve is a straight line curve of production possibilities and reflects the contact opportunity of the cost. It is pertinent to mention here that this is straight line for production possibility curve which shows the cost regarding constant opportunity. This is not one of the practical manifestations of entire economy; however, it may represent goods’ production.
- Concave: The Decreasing Cost: This is a curve concave in shape and is called production possibilities concave curve with reducing opportunity cost. Situation like this, opportunity cost decreases actually with the greater production. In some of the cases the opportunity cost also can be decreased, this is very rear to happen to the economy.
Conclusion
The opportunity cost, associated with the second top choice, is a sacrifice that a group or someone, who has selected one of the choices among many. The idea of the opportunity cost in business plays a vital role in order to ensure that the scarce resources available are efficiently, effectively and timely be used. Opportunity costs not always are the monetary units. These are also not able to create a good in excess of another. In some of the cases, opportunity cost may also be unidentified, or generate a number of series of costs known as sub opportunity. The relationship between opportunity cost and supply of goods can be easily described through curve known as: Production Possibilities Curve”.
References
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Irvin, B. T. (2008). Macroeconomics for Today. Stamford: Cengage Learning.
Mankiw, N. G. (2011). Principles of Economics. Stamford: Cengage Learning.
Nicholas, G. M., & Mark, P. T. (2006). Microeconomics. Stamford: Cengage Learning EMEA.
Production Possibilities Frontier. (n.d.). Retrieved from http://www.geocities.ws: http://www.geocities.ws/chimichichi/economics/ppf.htm
