Question

Explain the following with an example:

opportunity cost.

Answer 1

1. Opportunity cost means the benefit sacrificed for selecting a particular course of action.
2. It is the maximum advantage that could be obtained if the resource was put to an alternative use.
3. The opportunity cost of producing one commodity A is the amount of B that must be sacrificed in order to use resources to produce A rather than B.
4. In other words, the opportunity cost of anything is the next best alternative that could be produced instead by the same factors or by an equivalent group of factors costing the same amount of money.
5. For example, a firm buys a machine for ₹ 25,000. This amount could be invested in shares or debentures.
6. The loss of dividends or interest that could be earned is the opportunity cost.
7. Opportunity costs are not recorded in books of accounts.
8. It is useful in comparing alternatives and making decisions.