Opportunity cost Differential cost between the alternatives of producing or not producing surfboard B Every decision involves a choice from among at least two alternatives. The costs and benefits of the alternatives should be compared when making the decision. A relevant cost or benefit is a cost or benefit that differs between alternatives. Differential costs are relevant costs.
The nature of basic economic problems can be better understood and distinguished from each other with the aid of an important tool of modern economics known as production possibility curve.
Production possibility curve is also called the production possibility frontier. Production possibility curve frontier is a graphic representation of alternative production possibilities facing an economy. As the total productive resources of the economy are limited, the economy has to choose between different goods.
The productive resources can be used for the production of various alternative goods. It has, therefore, to be decided which goods are to be produced more and which ones less. In deciding what amounts of different goods are to be produced, the society would in fact be deciding about the allocation of resources among different possible goods.
How much labour should go into raising wheat on the farms and how much should be employed in manufacturing cloth. How many factories would produce armaments for the army and how many should produce consumer goods for the civilians. In order to simplify our analysis we shall assume that two types of goods—wheat and cloth—are to be produced.
We shall explain the production possibilities with these two goods but the analysis made will equally apply to the choice between any other two goods.
Let us assume that there is a given amount of productive resources and they remain fixed. Although resources are fixed in quantity, yet they can be shifted from the production of one good to another. Further, we assume that the given resources are being used fully and with utmost technical efficiency.
In other words, we assume that resources are neither unemployed and under-employed, nor inefficiently utilized. That means that economy is working at the level of full-employment and achieving maximum possible production. We also presume that technology does not undergo any change. In other words, we rule out any progress in technology.
In short, we assume fixed resources, full-employment, complete technical efficiency and a given technology. All these assumptions imply that we are looking at our economy at some particular point in time or over a very short period of time.
This is because it will be very unrealistic to rule out progress in technology and growth in the supply of resources over a long period of time. With the given amount of resources and a given technology, we have constructed the following table showing various production possibilities between wheat and cloth.
If all the given resources are employed for the production of wheat, it is supposed that 15 thousand quintals of wheat are produced. On the other hand, if all the resources are devoted to the production of cloth, 5 thousand metres of cloth are made.
But these are the two extreme production possibilities. In between these two, there will be many other production possibilities such as B, Q D and E.
With production possibility B, the economy can produce, with given resources, 14 thousand quintals of wheat, and one thousand metres of cloth and with production possibility C, the economy can have 12 thousand quintals of wheat and 2 thousand metres of cloth and so on.
As we move from possibility A towards F, we draw away some resources from the production of wheat and devote them to the production of cloth. In other words, we give up some units of wheat in order to have some more units of cloth.
As we move from alternative A to B, we sacrifice one thousand quintals of wheat for one thousand metres of cloth.Jun 05, · When two or more interventions are compared cost utility effectiveness analysis makes the opportunity cost of the alternative uses of resources explicit.
Cost effectiveness ratios, that is the £/outcome of different interventions, enable opportunity costs of each intervention to be compared.
3. Opportunity Cost. Opportunity costs should be considered in decisions. There is no opportunity cost involved in using a resource that has excess capacity. However, if the resource is a constraint (i.e., there is no excess capacity) then there is an opportunity cost.
Opportunity Cost Introduction In this paper you are going to have a list of questions referring to opportunity cost, absolute advantage, and comparative advantage. This is based on Michelle being able to grow pounds of potatoes or raise 50 chickens if she uses all her resources for each.
The opportunity cost of that choice is the value of the best alternative given up. Scarcity is a major problem for every society.
It exists because human wants for goods and services surpass the quantity of goods and services that can be produced using all available resources. The scarcity of resources and the opportunity cost impose the non-wasting of resources to maximize the product, consumption and hence social welfare.
This is achieved on the one hand through the harmonization of the allocation of resources among productive uses of the social needs and preferences, and on the other through the savings of.
The social cost of energy includes the price we pay at the gas pump—known as the “private costs”—plus the less obvious impact of energy use on health, the environment, and national security.