question_answer

What is Opportunity Cost? Explain with the help of an example.

Answer:

The cost of enjoying more of one good in terms of sacrificing the benefit of another good is termed as opportunity cost of the additional unit of the good.
Production Possibility Curve
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 above figure, as we move downwards along the PPC from left to right (i.e. from A to E), we observe that in order to produce more units of capital goods, the economy must sacrifice some amount of consumer goods. In other words, it reflects the opportunity cost of producing one good in terms of another good. For example, a movement from point B to point C implies that the economy is diverting resources from the production of consumer goods to the production of goods.
In order to produce one additional unit of capital good, the economy is sacrificing four units (i.e. \[48-44\] units) of consumer goods. Thus, the opportunity cost of producing one additional unit of capital goods is 4 units of consumer goods.
\[\text{Opporunity}\,\,\text{Cost}\,\,\text{from}\,\,B\,\,\text{to}\,\,C=\frac{\text{Amount}\,\,\text{of}\,\,\text{Consumer}\,\,\text{Goods}\,\,\text{Sacrificed}}{\text{Amount}\,\,\text{of}\,\,\text{Capital}\,\,\text{Goods}\,\,\text{Gained}\,}\]
\[\frac{(44-48)}{(2-1)}=-\,4\]