<Last updated 13.04.2020>
Hi! If you are interested in Economics, I’ve prepared the below to help your understanding. You should take a look at this short article in which I discuss what its Opportunity Cost and how it relates to production.
For many people, cost means to pay a specific amount of money. In reality the real cost is “hidden”.
We have already pointed out that, due to scarcity, there are limited quantities of factors of production available thus limited quantities of goods and services that can be produced. An economy that is fully utilizing the quantities of factors of production in the production process cannot produce more quantity of one good unless it reduces the production quantity of the other good.
In other words, there is a trade-off involved. Increasing production of one good means reduction of production of the other good. That is the opportunity cost in production. The consumer can use his/her limited amount of money to buy more of one good but then he/she will have to buy less of the other good. Opportunity Cost is the loss of other alternatives (quantities) when one alternative is chosen. Every action, choice, decision, has an opportunity cost associated with it.
Consumer – Decisions to be made with limited amount of money in Michael’s wallet:
Producer / Business – Decisions to be made with limited budget amount:
Economy – Decisions to be made with limited resources amount:
Calculating the Opportunity Cost = quantity of the good that is given up / quantity of the good produced as a result. (ΔQ1/ΔQ2)
The economy is producing less phones (10 less) to increase production of PCs (20 more). So 10/20 = 0.5 phones, the opportunity cost of producing more PCs. More factors of production (resources) will be used to produced more PCs so production of phones decreases. In other words, to produce 1 more PC the economy sacrifices 0.5 phones, For 2 more PCs the economy sacrifices 1 phone.. and so on.
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