Basic Concept of Economics – Opportunity Cost

5. Opportunity Cost/Real Cost:

Opportunity cost is the alternative forgoneThe alternative forgone on the scale of preferences is known as Opportunity Cost. The opportunity cost shows the alternate opportunities missed by the individual in choosing a certain preferred alternative. More, in order to satisfy the most important needs/wants. It refers to the sacrificed alternative. It is the need that is left unsatisfied, in order to satisfy another, more pressing, need and is referred to as Real Cost.

Mrs Shittu has ₦2500 and has the need for both food and clothes, which cost ₦1800 and ₦1600 respectively. Of course, she cannot buy both so, she will have to forgo one of them. If she buys the food for ₦1800, the opportunity cost or real cost to her is the clothes she did not buy.

Importance of Opportunity Cost:

1. It helps individuals to make a choice from alternatives.

2. It enables the firm to make decisions on how to allocate resources.

3. Opportunity cost helps to determine the method or techniques to use for effective production.

4. Opportunity cost guides the government in planning economic policies and budget preparation. 

5. It helps to maximize profit and resources.

6. It helps the government to determine and allocate resources to different sectors of the economy.

The Difference between Opportunity Cost and Money Cost:

Money cost is the amount of money spent on a commodity (it is the money paid for a particular item), while Opportunity cost is the cost alternative forgone. Opportunity cost is the Actual cost or Real Cost, while Money cost is the value of exchange for a commodity (denomination)

Money cost is also known as the Accountant cost. 

For example, Mr. Uche wants to buy a laptop and printer and each of them costs ₦80,000. If he has only ₦80,000 and decides to buy the laptop, the opportunity cost of buying a laptop is the printer he did not buy. While the money cost is the ₦80,000 he used to buy the laptop, with a monthly salary of ₦80,000, he can only purchase the most pressing one as listed above.