In our discussion of scarcity, we said that all resources are scarce relative to human wants. This constraint forces us to make choices or to economize on what is available to us. The concept of opportunity cost emphasizes the problem of choice by measuring the cost of obtaining a quantity of one commodity in terms of quantities of other commodities or services that could be obtained instead. By definition, opportunity cost is a ‘forgone’ alternative. The opportunity cost of a product is the alternative which must be given up in order to produce that product. Put in another way, the opportunity cost of a factor of production is the return that it could earn in its best alternative use. Economist emphasize that the true or real cost of anything is the opportunity missed in buying its alternative. If we choose to have one thing or more of one thing, we necessarily have to forgo others or have less of them. The sacrifice we make in terms of what we have obtained is the “opportunity cost “. For example, if a student has five dollars to buy either a book or a shirt, he has to make a sacrifice when he decides to buy one of them. If he chooses to buy a shirt instead of book, he sacrifices the book in order to obtain the shirt. The opportunity cost in this case refers not to the price of the shirt (5$) but the alternative (that is, the book) which the student forgoes in order to buy the shirt. Five dollars is the money cost of the shirt but its real cost is the book which the student has to forgo in order to purchase the shirt.


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