The concept of opportunity cost emphasizes the problem of cost. It reveals that every activity involves a sacrifice or cost which is measured by forgone earning or output. Secondly opportunity cost is important in resource allocation. When planning to erect a building on a piece of land, for example, a landlord will also weigh the cost of using the same piece of land for growing crops. Thirdly, the concept of opportunity cost helps the government to decide how to spend its revenue, for example, either to build roads with a certain sum of money or to use the money to improve welfare services or provide educational facilities. Any money set aside for roads will no longer be available for education or social welfare. Should the government build roads and forgo the education of its people, for instance, or should it share its revenue between roads and education? If the latter is decided on, then in what proportion should they be, so that the alternative cost of having illiterate citizenry will be reduced? The concept of opportunity cost, therefore, helps the government in its decision-making. Fourthly, the real cost concept also helps the manufacturing firms in deciding the techniques of production. If they use more capital-intensive methods, they will be displacing labour and creating more unemployment. If, on the other hand, they employ labour-intensive methods, more labour will be employed but less sophisticated machinery and other equipment will be used. The real cost of employing more labour is the loss of large-scale production facilities required in capital-intensive methods.


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