UGM June 2019 Q85
- Option : B
- Explanation : The concept of opportunity cost is one of the most important concepts used in economic and business analyses. The opportunity cost concept is used in making choice from the alternative opportunities available to a person or to a business firm. We explain here a briefly the concept of opportunity cost.
The concept of opportunity cost is related to the scarcity of resources and their alternative uses. As pointed out earlier, resources available to any person, firm, or society are limited. But resources have alternative uses with different products, i.e., income or returns from the alternative uses of resources are different. While one kind of use yields a higher income or return, the other uses yield a lower return or income. Due to income maximizing behaviour, people (individuals, households and firms) put their scarce resources to the use that yields highest income, return or benefit. When they put their resources to the use yielding highest income, they sacrifice the income expected from the next, the second-best, use of the resources. In economics terminology, this sacrifice is called, the opportunity cost of earning from the best use of resources. Such as it is, opportunity cost may be defined as income expected from the second-best use of the resources which is sacrificed for the best use of the resources. Thus, the opportunity cost is an opportunity lost. From a firm’s point view, opportunity cost of using a resource is what the firm must give up to use the resource as it is used.
In economics terminology, this sacrifice is called, the opportunity cost of earning from the best use of resources. Such as it is, opportunity cost may be defined as income expected from the second-best use of the resources which is sacrificed for the best use of the resources. Thus, the opportunity cost is an opportunity lost. From a firm’s point view, opportunity cost of using a resource is what the firm must give up to use the resource as it is used.
Opportunity cost is also called alternative cost. It is an alternative cost because it arises due to the possibility of alternative uses of the resources. If a resource has only one use, i.e., it has no alternative use, there would not be any alternative or opportunity cost.
