Concept Of Opportunity Cost

In micro economic theory, the opportunity cost, also known as alternative cost, is the value of the choice of a best alternative cost while making a decision. A choice needs to be made between several mutually exclusive alternatives; assuming the best choice is made, it is the “cost” incurred by not enjoying the benefit that would have been had by taking the second best available choice. The New Oxford American Dictionary defines it as “the loss of potential gain from other alternatives when one alternative is chosen.” Opportunity cost is a key concept in economics, and has been described as expressing “the basic relationship between scarcity and choice. The notion of opportunity cost plays a crucial part in attempts to ensure that scarce resources are used efficiently.Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered an opportunity cost.

Opportunity costs in production:

Implicit costs

Implicit costs is also called implied, imputed or notional costs, are the opportunity costs that are not reflected in cash outflow but implied by the failure of the firm to allocate its existing resources, or factors of production to the best alternative use. For example: a manufacturer has previously purchased 100 tons of steel and the machinery to produce a widget. The implicit part of the opportunity cost of producing the widget is the revenue lost by not selling the steel and not renting out the machinery instead of using it for production.

Explicit costs

Explicit costs are opportunity costs that involve direct monetary payment by producers. The explicit opportunity cost of the factors of production not already owned by a producer is the price that the producer has to pay for them. For instance, if a firm spends R.s 100/- on electrical power consumed, its explicit opportunity cost is R.s 100. This cash expenditure represents a lost opportunity to purchase something else with the R.s 100/-.