There are two kinds of opportunity costs a business can incur: 1. Opportunity costs are quite important to companies and businesses because of how it allows them to gauge and determine how to effectively manage their resources and funds while aiming to maximize and grow. We know opportunity costs as economic costs or financial costs. Quite a dilemma isn’t it? What are the types of opportunity costs? This is also why star athletes don’t usually finish their College education and prefer a lucrative career in sports instead.ĭo you as an investor sell your stocks now and gain remuneration or do you wait for stock values to potentially rise even higher and then sell? His Opportunity cost would have been upwards of 10 Million dollars, seeing as that was his pay for the first few years as an NBA player. Kobe Bryant during the end of high school could have chosen to take up tuition with four years of college instead of signing for the LA Lakers. Because at a time of scarcity, every decision taken becomes an opportunity cost.Ī simple example of how opportunity cost works: The concept of opportunity cost stems from an economy or situation of scarcity. In the business world, opportunity cost is simply – The cost of the value of what one loses when choosing between two or more business options. This quote holds true in terms of what we call opportunity cost. 21.3) This is so because at U the economy will be under-employing its resources and H is beyond the resources available.“There’s no such thing as a free lunch” – a famous quote by Nobel Prize-winning economist Milton Friedman. For example, the combined output of the two goods can neither be at U nor H. It is to be remembered that all the points representing the various reduction possibilities must lie on the production possibility curve AF and not inside or outside of it. The production possibility curve is also called transformation curve, because when we move from one position to another, we are really transforming one good into another by shifting resources from one use to another. In this diagram AF is the production possibility curve, also called or the production possibility frontier, which shows the various combinations of the two goods which the economy can produce with a given amount of resources. The following diagram (21.2) illustrates the production possibilities set out in the above table. This is due to the basic fact that the economy’s resources are limited. This means that, in a full-employment economy, more and more of one good can be obtained only by reducing the production of another good. As we move from A to F, we sacrifice increasing amounts of cotton. At B, the economy can produce 14,000 quintals of wheat and 1000 quintals of cotton.Īt C the production possibilities are 12,000 quintals of wheat and 200u quintals of cotton, as we move from A to F, we give up some units of wheat for some units of cotton For instance, moving from A to B, we sacrifice 1000 quintals of wheat to produce 1000 quintals of cotton, and so on. These are the two extremes represented by A and F and in between them are the situations represented by B, C, D and E. If, on the other hand, all available resources are utilized for the production of cotton, 5000 quintals are produced. It all available resources are employed for the production of wheat, 15,000 quintals of it can be produced. The following table gives the various production possibilities. We suppose that the productive resources are being fully utilized and there is no change in technology. Let us suppose that the economy can produce two commodities, cotton and wheat. If it is decided to produce more of certain goods, the production of certain other goods has to be curtailed. In other words, the economy has to choose which goods to produce and in what quantities. The productive resources of the community can be used for the production of various alternative goods.īut since they are scarce, a choice has to be made between the alternative goods that can be produced. The production possibility curve represents graphically alternative production possibilities open to an economy.
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