Opportunity cost happens when we forgo an alternative activity or use of resources to produce goods and services. The benefits from producing goods or services which you forgo is the opportunity cost.
The most common example is to decide to either produce Product A or Product B. The opportunity cost of producing Product A will be earnings of producing and selling Product B.
EXAMPLE:
You have pocket money of $10 to spend in school. You spend $5 on food and wanted to spend the remaining $5 to buy a book that would help you in your homework. But your friends have asked you to go to the arcade with them to play some games after school. What should you do? What would be the opportunity cost if you:-
Option 1 - Buy the book
If you choose to buy the book, you would be able to complete your homework, but you would not get to have fun with your friends at the arcade. Your opportunity cost would be an opportunity to have fun with your friends at the arcade.
Option 2 - Go with your friends to the arcade
If you choose to head over to the arcade, you would have had fun for the day, but will not be able to complete your homework. Your opportunity cost would be the opportunity to learn something new from the homework you would have completed.
In business, however, the opportunity cost is expressed by the cost you save or revenue or profit you would have gained from producing or selling one product over another.
Can you think of another example of opportunity cost? Comment below
RELATED QUESTION
How does opportunity cost happen when you add value into a product?
RELATED CONCEPTS
Cost
Profit
Revenue
Value Add
PAST YEAR QUESTIONS
Define 'opportunity cost (2 marks) May/June 2020/13