what is opportunity cost

What is Opportunity Cost?

Learn about Opportunity Cost with Farhan
Luck by Chance 2009

The scene shows three friends, Sameer, Vikram (played by Farhan Akhtar), and Arjun having coffee. Sameer (Film Assistant) receives a call from the set that informs him that the production house is in a dire need of a ‘Grandfather Clock’. Vikram decides to do Sameer a favor by giving him the clock.

To return the favor, Sameer invites Vikram to a premiere of a movie and promises to introduce him to some influential people in the industry.

Vikram, who is an aspiring actor made a choice at the moment to receive a benefit. In this blog, Learning Perspectives will explore the meaning of opportunity cost.

What is Opportunity Cost?

Opportunity cost is the choice that one makes that makes them miss the benefit This is an invisible cost. Similar to the scene that we saw, if Vikram would have not helped Sameer, he would have missed out on the benefit derived from helping him.

Another example could be a choice between watching a two-hour movie or attending a two-hour lecture. If the student decides to watch a movie, he/she forgoes the lecture and the benefit derived from it. If the student decides to attend the lecture they let go of the fun or joy derived from watching a movie.

Because of scarcity, people must make choices, and each choice incurs a cost (sacrifice) known as opportunity cost. It applies to personal, group, and national decision-making and underpins all aspects of economics, as it is linked closely to scarcity.

Economics is concerned with the study of scarcity and choice. The problem of scarcity forces people to make choices. Economics is the study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants. Scarcity implies that society’s capacity to produce combinations of goods is constrained by its limited resources.

This condition can be represented in a model called the production possibilities frontier (PPF). The PPF shows the maximum combinations of two outputs that an economy can produce, given its available resources and technology.

what is opportunity cost

All the points along the frontier are maximum output levels with the given resources and technology, they are all efficient points.

Points outside the PPF represent unattainable production possibilities, given current resources and technology.

Points inside the PPF represent an inefficient use of current resources.

Opportunity cost increases as the production of one output expand at the expense of another. This occurs because factors of production are generally not equally suited to producing one good, compared to another good.

That is, opportunity costs rise as resources are shifted away from their best use.

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