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Home > Research > Opportunity Cost

Opportunity Cost

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Opportunity cost involves a decision that is arrived at by basing on various ideas that are supposed to be given up for the sake of the next best alternative, which in this case it is supposed to be as a result of the agreed decision. Therefore, this indicates that any decision that is made and it involves making choice between two or more alternatives has a case of opportunity cost. In these two cases, Michelle’s opportunity cost of producing potatoes is the difference between the decisions of selecting potatoes over chicken, and in this case it is 50 / 200 = 0.25 chicken. This indicates that Michelle will experience an opportunity cost of 0.25 chickens for 1 pound of potatoes, in relation to the idea that she has decided to produce potatoes instead of chicken. On the same case, Michelle’s opportunity cost of producing chicken is the difference between the decisions of selecting chicken over potatoes, which will result to 200 / 50 = 4 pounds of potatoes. This indicates that Michelle will experience an opportunity cost of 4 pounds of potatoes for 1 chicken, in relation to the idea that she has decided to produce chicken instead of Potatoes.

James’ opportunity cost of producing potatoes is the difference between the decisions of selecting potatoes over chicken, and in this case it is 40 / 80= 0.5 chickens. This indicates that James will experience an opportunity cost of 0.5 chickens for 1 pound of potatoes, in relation to the idea that he has decided to produce potatoes instead of chicken. On the same case, James’ opportunity cost of producing chicken is the difference between the decisions of selecting chicken over potatoes, which will result to 80 / 40 = 2 pounds of potatoes. This indicates that James will experience an opportunity cost of 2 pounds of potatoes, in relation to the idea that he has decided to produce chicken instead of Potatoes.

Michelle has an absolute advantage in potatoes, while James has an absolute advantage in chicken. In this case, Michelle will be able to make more returns when opting for potatoes as compared to chicken, and vice versa for James. On the comparative basis, Michelle has a comparative advantage of potatoes over James, since she is able to produce a large a mount of potatoes as compared to what James is producing. On the other hand James has comparative advantage of chicken over Michelle, since the option chicken does not favor her when compared to her option of potatoes.

Specializing completely in the area in which they have a comparative advantage indicates that Michelle will opt for potatoes while James major in chicken, and considering that they will be trading at a rate of 2.5 pounds of potatoes for 1 chicken, they will not all be better off. In this case, the initial trading rate is supposed to be 5 pounds of potatoes for 1 chicken, and looking at the projected trading rate it indicates that Michelle’s rate of production will reduce by a half, so she will end up producing 100 pounds of potatoes, compared to 40 chickens for James on annual basis.

The above idea of opportunity cost is considered to be significant in many ways, especially concerning its application to variety of issues within the society and the nation at large. In the long run, the knowledge of opportunity can be applied in the following areas that are found to have significant benefits to the society.

  1. Selection of consumers for a certain product or service
  2. Determining of effective production potentials
  3. Determining cost of capital in businesses
  4. Helping in time management, especially during transactions
  5. Determining a better career choice
  6. Carrying out of a comparative advantage analysis, especially when determining the best option of the choices one has in terms of sales and returns generation.
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