Chapter 3. OPPORTUNITY COST.
1. What is the meaning of the word opportunity cost? Explain.
Opportunity cost is defined as the benefit or value of the next best alternative that
must be given up when a choice is made.
This economic concept highlights that resources are limited and selecting one option
means forgoing others with potential benefits
Example-1:- Examples of opportunity cost considerations include investing in a new
manufacturing plant in Los Angeles as opposed to Mexico City, deciding to upgrade
company equipment rather than hire additional workers, or buying stock A and not
stock B.
Example-2:- if a manufacturer must choose between building a new plant in Location
A or Location B, the opportunity cost is the potential gain lost from not choosing the best
alternative site
Formula for Calculating Opportunity Cost
We can express the opportunity cost related to investing by calculating the difference
between the expected returns of two investment options.
Opportunity Cost =RMPIC−RICP
where:
RMPIC = Return on most profitable investment choice
RICP = = Return on investment chosen to pursue
Opportunity Cost=RMPIC−RICP
where:
(RMPIC=Return on most profitable investment choice
RICP=Return on investment chosen to pursue)
2. How opportunity cost influence on decision making of consumers? Or Explain
the influence of opportunity cost on consumers' decisions?
Ans: - Consumers are buyers and users of goods and services. We are all consumers.
The vast majority of us cannot buy everything we like .You may, for example, have to
choose which economics dictionary to buy. You will probably consider a number of
different ones, taking into account their prices. The choice will then tend to settle on two
of them. You are likely to select the one with the widest and the most accurate
informative coverage. The closer the two dictionaries are in quality and price, the harder
the choice will be.
3. How opportunity cost influence on decision making of workers?
Ans: - Opportunity cost significantly influences a worker's decisions by shaping their
choices regarding career paths, job changes, and investments in skills. By
understanding the potential benefits they forgo when choosing one option over another,
workers can make more informed decisions that align with their long-term goals and
maximize their overall well-being.
4. How opportunity cost influence on decision making of Government?
Government has to carefully consider its expenditure of tax revenue on various things.
If it decides to spend more on education, the opportunity cost involved may be a reduced
expenditure on healthcare it could, of course, raise tax revenue in order to spend more
on education. In this case, the opportunity cost would be put on the taxpayers To
pay higher taxes. people may have to give up the opportunity to buy certain products
or to save.
5. How opportunity cost influence on decision making of Producer?
Producers have to decide what to make.
If a farmer uses a field to grow sugar beet, he cannot keep cattle on that field
If a car producer uses some of his factory space and workers to produce one model of
a car, he cannot use the same space and workers to make another model of the car at
the same time In deciding what to produce, private sector firms will tend to choose the
option which will give them the maximum profit.
They will also take into account the demand for different products and the cost of
producing those products.
6. Discuss why the opportunity cost of working as an accountant is likely to be
higher than that of working as a window cleaner.
Ans:_ The opportunity cost of working as an accountant is likely higher than that of
working as a window cleaner because accountants often possess skills and qualifications
that are transferable to a wider range of higher-paying professions, making the potential
alternative income greater. Conversely, window cleaners, while valuable, have a more
limited set of skills applicable to specialized, higher-paying roles.
TEXT BOOK QUESTIONS
7. Define opportunity cost?
Opportunity cost refers to the value of the next best alternative that is given up when a
choice is made. In other words, it's the cost of choosing one option over another.
When you choose to do something, you're implicitly giving up the opportunity to do
something else. The opportunity cost is the potential benefit or value that could have
been gained if you had chosen the alternative option.
For example:
- If you choose to spend ₹1,000 on a concert ticket, the opportunity cost is the ₹1,000
you could have spent on something else, like a new book or a dinner with friends.
8. Explain why opportunity cost is an important concept for producers?
Opportunity cost is crucial for producers because it represents the potential benefits
they sacrifice when choosing one production option over another. By understanding
opportunity cost, producers can make more informed decisions about resource
allocation, production choices, and ultimately, maximize their potential profits and
efficiency.
9. Analyse what effect the building of an airport may have on the decision of how
to use an area of land nearby.
Building an airport can significantly influence land-use decisions in nearby areas.
Economic growth, noise and air pollution, and infrastructure needs all play a role in
shaping land use patterns.
Commercial development often thrives near airports due to increased accessibility,
while residential development might be discouraged due to noise and other
environmental impacts.
The building of an airport can have significant effects on the decision of how to use an
area of land nearby, including:
A. Noise pollution: Airports generate noise, which can limit nearby land use to
non-residential purposes.
B. Safety considerations: Land near airports may be restricted due to safety
concerns, such as crash zones or flight paths.
C. Accessibility and connectivity: Airports can increase the attractiveness of
nearby land for businesses, logistics, and tourism.
D. Environmental impact: Airports can lead to increased air pollution, which may
affect nearby land use.
E. Economic growth: Airports can stimulate local economic growth, influencing
nearby land use for commercial or industrial purposes.
F. Displacement: Airport construction can displace existing land uses, such as
agriculture, housing, or natural habitats.
G. Infrastructure development: Airports often require supporting infrastructure,
like roads and utilities, affecting nearby land use.
The decision of how to use nearby land will depend on balancing these factors
with local needs and priorities.
