What is opportunity cost?

The opportunity cost of any good is the next best alternative good that is sacrificed. Put another way, the benefits you could have received by taking an alternative action. A farmer who is producing wheal can also produce potatoes with the same factors.

According to Prof Benham, “The opportunity cost of anything is the next best alternative that could be produced instead by the same factors or by a equivalent group of factors, costing the same amount of money.”

We can explain the opportunity cost with the help of production possibility curve (IPC). If there is increase in productive resources, increasing production of a first good has to entail decreasing production of a second, because resources must be transferred be the first and away from the second.

As per diagram, the sacrifice in the production of Gain is called opportunity cost. Opportunity cost is measured in the number of unit of Gain that are forgone if an additional unit of wine is made.