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Unit 1 Opportunity Cost

This document discusses the concept of opportunity cost. It defines opportunity cost as the value of the next best alternative forgone when a choice is made between mutually exclusive options. While not treated as an actual financial cost, opportunity cost analysis is an important part of decision making. The document provides an example of Robert Frost's poem to illustrate how taking one path forgoes the opportunity of what could have been gained by taking the alternative path. It concludes that all economic decisions incur opportunity costs as resources could always be used in other ways.

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SUSHANTH E REVANKAR
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80 views10 pages

Unit 1 Opportunity Cost

This document discusses the concept of opportunity cost. It defines opportunity cost as the value of the next best alternative forgone when a choice is made between mutually exclusive options. While not treated as an actual financial cost, opportunity cost analysis is an important part of decision making. The document provides an example of Robert Frost's poem to illustrate how taking one path forgoes the opportunity of what could have been gained by taking the alternative path. It concludes that all economic decisions incur opportunity costs as resources could always be used in other ways.

Uploaded by

SUSHANTH E REVANKAR
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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OPPORTUNITY COST

Opportunity costs is the concept of cost


necessary for economic decisions
WHAT IS OPPORTUNITY
COST?
 Sometimes it is easier to understand a concept
starting out what it is not.
 Usually we think of costs as out-of-pocket
costs
5rs (cost of a cup of coffee)
5lakhs (cost of car)
 At the time we make the decision to buy the cup
of coffee or the car, this out-of-pocket cost is
also (usually) the opportunity cost
 With the passage of time, the two tend to
diverge from each other
• Opportunity cost or economic
opportunity loss is the value of a product
forgone to produce or obtain another product.
Opportunity cost analysis is an important part of
a company's decision-making processes, but is
not treated as an actual cost in any financial
statement. The next best thing that a person can
engage in is referred to as the opportunity cost
of doing the best thing and ignoring the next
best thing to be done.
Opportunity cost is a key concept in
economics because it implies the choice between
desirable, yet mutually exclusive results. It has
been described as expressing "the basic
relationship between scarcity and choice." The
notion of opportunity cost plays a crucial part in
ensuring 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. There is always an opportunity cost
in a decision that is made either in economics or
everyday life.
EXAMPLE OF OPPORTUNITY COST
THE ROAD NOT TRAVELED
 Opportunity cost, then, is a measure of what
has been given up when we make a decision.
 Consider what Robert Frost had in mind when

he wrote,
Two roads diverged in a wood, and I
I took the one less traveled by,
And that has made all the difference.
 Imagine the immeasurable opportunity cost to

all of us if Robert Frost had taken the road


more traveled by.
CONCLUSION

Economics costs include, in addition to


explicit money outlays, those opportunity cost
incurred because resources can be used in
alternative ways.
THANK YOU

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