Menu Close

Why is opportunity cost important in allocation of resources?

Why is opportunity cost important in allocation of resources?

Opportunity cost is a key economics concept and can be used to explain how economics allocates scarce resources. This implies that there has to be a choice regarding utilising a resource. This trade-off can be between a number of different choices.

What is opportunity cost and resource allocation?

Opportunity Costs Definition. In economics, opportunity costs refer to the value of the next-best alternative use of that resource given limited resources. When resources are scarce, consider the cost between alternatives. Do this so that resources (such as time, money, and energy) are used as efficiently as possible.

How does opportunity cost allocate resources efficiently?

Increasing Opportunity Cost As more resources are allocated to produce one good, the cost of an additional unit of the good increases after a certain point, because when only a few units of the good are produced, then the most suitable factors of production are used, lowering the cost of producing the good.

What is the importance of opportunity costs to economic agents?

Opportunity cost is important to economic agents, such as consumers, producers and governments. For example, producers might have to choose between hiring extra staff and investing in a new machine. The government might have to choose between spending more on the NHS and spending more on education.

What is opportunity cost discuss the economic importance of opportunity cost?

Opportunity costs represent the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. Because opportunity costs are, by definition, unseen, they can be easily overlooked.

What is opportunity cost and its importance in decision-making?

Opportunity cost is the potential profit that an individual, investor, or business loses when choosing one alternative over another. Understanding the potential for missed opportunities by choosing one alternative over another allows for better decision-making, especially with the help of an accounting system.

Why is opportunity cost important for government?

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.

What is the importance of opportunity cost to an individual?

(b)(i)Importance of opportunity cost to individuals: It helps individuals to make judicious use of their scarce resources to satisfy unlimited wants. For example, a farmer can use a piece of land for planting cocoa or coffee.

How are opportunity costs and relevant costs related?

We can also understand how opportunity costs are also relevant costs by putting the opportunity cost accepting customer’s order in our example against the basic three points criteria of relevant cost. Relevant cost is a future cost. The loss of profits will happen in future if production is stopped. Relevant costs consists of actual cash flows.

What is the opportunity cost of one table?

Suppose, opportunity cost of 1 table is 3 chairs and the price of a chair is $100, while the price of a table is $400. Under such circumstances, it is beneficial to produce one table rather than 3 chairs.

What does it mean when there is no opportunity cost?

If there is no option available, then there is no Opportunity Cost. Further, the available options should have an economic value. The foregone option may be a product or a service. These options can be anything- from taking production decisions to investment decisions.

What is the opportunity cost of making a product?

The opportunity cost of building a product is the loss of Opportunity in providing another product. A producer may choose to go for product A after evaluating the benefits he will derive if he produces product B. A manufacturer may also assess the implicit opportunity cost of missing out on earning a salary income if he works elsewhere.