What is opportunity cost, and how is it different from accounting cost? Give an

Question

What is opportunity cost, and how is it different from accounting cost? Give an example of how the Principle of Opportunity Cost applies to your life. Think of a recent decision you made. It could be a decision as simple as whether to eat out or cook at home. Or, it could be a decision to quit your job and go back to school. What alternatives did you consider? How did you arrive at your final decision? Did you implicitly weigh marginal cost and marginal benefit? How does the concept of opportunity cost apply to production possibilities curve (PPC) analysis? How can we use PPC analysis to examine the opportunity cost of what we do?

Explanation / Answer

Opportunity cost is the value of the next best alternative forgone when choice has to be made between several mutually exclusive alternatives. It is an implicit cost and used only when economic profits have to be formulated. On the other hand, accounting cost considers only explicit cost like payment to the factors of production and do not consider implicit cost of goods.

It can be applied in our life when deciding to pursue higher education or going for a job after completing graduation. If you decided to pursue further studies, it is because you consider that the knowledge gained in higher education will help to earn higher income later. For this you are ready to forgo the income received in your current job which you opted after your graduation. Thus, opportunity cost of opting for higher education studies is the income earned in your current job profile.Thus, marginal benefit of pursuing higher education is higher than the marginal cost.

The PPCc can also illustrate the opportunity cost of change in the quantity produced of one good. The slope of PPC represent Opportunity cost of producing a good or the number of units of one good forgone to produce more units of other good.

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