Opportunity Cost

Opportunity Cost
: The value of the next-best alternative that must be forgone in order to undertake an activity.

Working Definition:
Opportunity cost of a production or consumption choice = The value of the next best option

If you have 100 Rs and with this 100 Rs you can either buy a shirt or watch a movie. If you will watch the movie then the opportunity cost of watching the movie is the value of shirt that you would have bought in place of movie.

Opportunity cost in terms of PPC
Sacrifice of commodity X from point B to point C to get extra units of commodity Y from D to E.
Sacrifice of commodity X from point B to point C = Opportunity Cost to get ed units of good y.


Niles said...

Thank you so much for explaining opportunity cost in detail. I was looking for examples of implicit cost and explicit cost to clear my understanding and found a very good piece of information over here. Opportunity cost and sunk cost may be it will help in the further understanding of these costs.

Tim Jansen said...

Thanks for your detailed post. Really enjoyed it.

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loraine said...

thanks for the explanation i can now understand it in a better way