“Opportunity Cost”

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 13.04.2020>

Dear reader,

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.

Examples:

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.


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

References:
Ιωάννου-Σεργίου Μ., Μάτση Μ., Σάββα Ν., Σταύρου-Παπαδοπούλου Λ., Οικονομικά Α’ Λυκείου, Α΄ Έκδοση 2016. Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Βλαδιμήρου-Παναγιώτου Β. και Κουζαλή-Σωτηρίου Ε., Οικονομικά Β’ Λυκείου, Κύπρος, Α΄ Έκδοση 2016.  Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Βλαδιμήρου-Παναγιώτου Β. και Κουζαλή-Σωτηρίου Ε., Οικονομικά Γ’ Λυκείου, Κύπρος, Α΄ Έκδοση 2017.  Υπηρεσία Ανάπτυξης Προγραμμάτων, Κύπρος.
Besanko, David Braeutigam, Ronald R. Gibbs, Michael, 2011, Microeconomics, Hoboken: John Wiley, 4th ed,
International student version
Frank, Robert H., 2010, Microeconomics and Behavior, New York: McGraw-Hill Irwin, 8th ed.
Estrin, Saul Laidler, David E. W. Dietrich, Michael ., 2008, Microeconomics, Harlow: FT/ Prentice Hall, 5th ed.

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.

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