Answer to Question #40835 in Economics of Enterprise for Nishu Dua
What is opportunity cost? Explain with the help of an example, why assumption of constant opportunity cost is very unrealistic?
The opportunity cost of a choice is the value of the best alternative forgone, in a situation in which a choice needs to be made between several mutually exclusive alternatives given limited resources. Assuming the best choice is made, it is the "cost" incurred by not enjoying the benefit that would be had by taking the second best choice available. The assumption of constant opportunity costs is very unrealistic. It implies that all the factors of production are equally efficient either in the production of butter or in the production of guns. For many of the choice society make opportunity costs tend to increase as we choose more and more of an item. Such a phenomenon about choice is so common, in fact, that it has acquired a name: the principle of increasing marginal opportunity cost. This principle states that in order to get more of something, one must give up ever-increasing quantities of something else. In other words, initially the opportunity costs of an activity are low, but they increase the more we concentrate on the activity.