The concept of Opportunity Cost

The opportunity cost of an activity is equal to the value of the next alternative foregone. Alternatively, it is the cost in terms of the alternative foregone. In simple terms, one has to forego something for getting something and what is given up for getting something is called the opportunity cost of that thing.

This can be explained more clearly through the help of an example.

A clerk gets Rs 800 per month for giving private tuition after office hours but for that he foregoes Rs 500 which he would have got for working overtime after office hours. In this case, Rs 500 is the opportunity cost of giving tuition. Alternatively, remuneration lost is termed as opportunity cost and that is why it has been termed as the cost of foregone alternative.

IMPORTANCE:

The concept of opportunity cost is very important in the context of use of factors of production (or resources). Since the supply of factors is scarce and can be put to alternative uses, therefore, a factor can be utilized in one use sacrificing its use for other purposes. Further, it helps economists to know how limited resources get allocated in different branches of production. For example an economy can produce more wheat by sacrificing production of some other commodity say sugarcane.

The concept is also significant for an industry which must pay wages which are at least equal to what are being paid in other industries. Otherwise, the laborers will leave the industry and avail of the next possible use. Thus, it causes equality of payment of factor income to equally efficient factors.

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