The concept of the opportunity cost underlines the basic economic problems of scarcity and choice, and is relevant to the behaviour of individuals or consumers, firm or producers and of the government. It is very important concept in the economics.
The concept reveals that every human activity involving an economic decision entails sample real cost measured in terms of foregone alternatives.
The individual is faced with the problem of scarcity of resources, and so he has to makes a choice. The concept of opportunity cost is therefore relevant to him. It helps him in deciding how to spend his scarce resources. If an individual has # 20.00 and is faced with a choice between buying a pair of shoes and a shirt, he has to buy one if his money cannot buy both. If he buys the pair of shoes the real cost to him is the shirt he did not buy.
The producers or firms are faced with scarcity of resources also involved in making choice, so the concept of opportunity cost is relevant to them.it guides businessman in deciding how best to use the available productive resources. For example, if a firm with limited capital resources decides to invest in textile production instead of shoe production. The real cost to the firm is the shoe production which is foregone.
The concept of opportunity cost is also relevant to the behaviour of the government. This because the government also has limited resources at its disposal and so cannot carry out all the proposed project at the same time.
The concept helps the government in deciding how best to use it’s revenue.
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