Economics Part A

Opportunity Cost Definition

Opportunity Cost is when the cost of making something is expressed in terms of other products, not in monetary terms, the term opportunity cost is used. To make you fully understand opportunity cost definition - refer to the PPC of Country A. Assume that the populace have chosen Point A, and they produce 1,200 loaves of bread, and no guns at all. In the next year, they choose to move to Point B. The country adds 400 guns to its basket of goods, but at the same time it must forego production of 200 loaves of bread. These 200 loaves of bread are called the opportunity cost of the 400 additional guns that have been produced.

If the country decides to move to Point C, it will increase its gun production by 300, from 400 to 700. However, it must sacrifice baking another 600 loaves of bread. The price, or opportunity cost, that the country has paid in order to receive its 300 additional guns is 600 fewer loaves of bread (i.e., the country now bakes 400 loaves instead of 1,000).

As we can see in the given examples, nothing is measured in dollars or other monetary currency, going back to the opportunity cost definition - it is measured in terms of the opportunity forgone for the sake of other opportunity. Sacrificing the potential production of a given product is the price paid, i.e., the country sacrifices (in other words pays for) one product in order to receive another. In other words, Country A pays for its new guns by baking less bread.

Opportunity Cost Definition525Opportunity Cost Definition