Opportunity cost

Opportunity cost refers to a positive attributes that a person could have received, but gave up
and chose the other course of action. For instance a country’s economy has limited sources and
limited cost to buy scarce sources. It has two options either it can produce breads or cars.
Country decided to produce breads it gave up to produce the cars. It has foregone the benefits
of producing cars this is an opportunity cost.

How each of these following units experience an opportunity cost in

their decision making process?
A multinational company like Unilever

Unilever is such a big company with hundreds of brands all over the world. it produces home
and personal care products beauty products food products and professional cleaning products.

1. Unilever decided to produce blue band butter and it has foregone the cost of Lux in this
case lux is the opportunity cost and all benefits of producing Lux.
2. In second scenario if Unilever has gave up the cost of Knorr and produced Sunsilk
Knorr and advantages of producing Knorr is opportunity cost.
3. Unilever decided to produce surf excel it has foregone the cost of Prodent. So, in this
scenario Prodent is an opportunity cost experienced by Unilever.

A government

Government is necessary to the existence of civilized society. It experience opportunity cost in

following ways:

1. Government decided to construct a pathway for metro bus instead of flyover. The
opportunity cost was flyover.
2. In constructing colleges and hospitals government has chosen hospitals then colleges
and all its advantages are foregone. All foregone cost is opportunity cost.
3. When the government spends $15 billion on interest for the national debt, the
opportunity cost is the program the money might have been spent on, like education or
healthcare.

You as an individual

1. You buy a pizza and with that same amount of money you could have bought a Coke
and a hot dog. The opportunity cost is the Coke and hot dog.
 2. At the ice cream parlor, you have to choose between rocky road and strawberry. When
you choose rocky road, the opportunity cost is the enjoyment of the strawberry.
3. You attend baseball training to be a better player instead of taking a vacation. The
opportunity cost was the vacation.

Ques 2: Explain the concept of scarcity of resources and unlimited

wants. Elaborate on why this is termed as “the basic economic
problem”

“Scarcity means a situation where available resources are insufficient to produce

all the goods and services people wish to have.”

Resources:

“Resources are the inputs used to produce the goods and services that human
wants.” Resources are divided into four categories: Land, Labour, Capital,
Entrepreneurial abilities.

Limited Resources: Goods and services to satisfy human wants are not produced by

magic lamps but by using resources which are limited. These are put into four
general classes. Land, which includes all natural resources such as air, water,
vegetation, minerals. Labour, which includes human efforts and skills needed to
put natural resources to practical use. Capital, includes the goods already
produced which will be used to produce other goods e.g. buildings, equipment,
tools and human skills. Entrepreneurial abilities and managerial skills of the
people through which they combine other resources to produce useful goods.
Resources are so called inputs or factors of production.

Unlimited human wants: Wants are unlimited: People want much more than just
necessities of life like house, housing and clothing. If one want is satisfied,
another one arises. Scarcity compels us to make choices for the best use of
resources. Scarcity is termed as the basic problem because it is difficult to allocate
resources to the best use and in most effective way.

Economic problem is permanent: The bitter fact of human life is that economic
problem is permanent. Neither the resources will ever be available in unlimited
quantity, nor will humans be able to curtail wants to few.

Ques: 4 Elaborate on how does an economy can shift its production

possibility frontier outward?
ANS: The production possibility frontier is not fixed forever. If a country discovers
more resources, or its population increases and technology improves as well, so
production potential increases and the economy grows. In that specific case, PPF
shifts outward. The new frontier is C. Although the country’s capacity to produce
goods increases, yet the supply of goods will not become unlimited.

For example: If someone developed a faster computer, or a more efficient way of

manufacturing cars, we might see a shift right in the PPF. This means that
everything held constant, more goods can be produced after the technological
change. The outward shift could also occur as a result of economic growth.