Opportunity cost
Opportunity cost
is the next best alternative foregone for obtaining a thing.Opportunity cost
refers to what you have to give up to buy what you want in terms of other goods
or services.
Because of the problem of scarcity it
follows that choices have to be made. Consumers must choose what to buy out of
their limited incomes. Producers must choose what to produce with their limited
resources. Governments must choose what services to provide out of their
limited tax revenues.
Every choice involves a sacrifice and
this sacrifice is called opportunity cost. Opportunity cost is the sacrifice of
the next best alternative choice. For a consumer the opportunity cost of
choosing a product is the next item on his/her scale of preference. For a
producer the opportunity cost of producing a good is the next most profitable
product which could have been produced with the resources used. For a
government the opportunity cost of providing a service is the next best service
which it could have provided with the resources used.
In economics we assume that people
are rational, i.e. when faced with a choice they will always choose the
alternative that will give them the greatest satisfaction. This involves
weighing up all the alternatives and then choosing the one that has the lowest
opportunity cost.
