Which of the following best describes the concept of 'opportunity cost' in microeconomics?
Show answer & explanation
Correct answer: D
Explanation
Correct Answer: Option 4 (The cost of forgoing the best alternative)
Explanation:
Opportunity cost is a crucial concept in economics. It means that when we choose one option, we have to give up another, better alternative. The value of that forgone or forgone next-best alternative is called 'opportunity cost'.
For example: If you have ₹100 and you can either buy a book or watch a movie, the pleasure of watching the movie will be your 'opportunity cost'.
Additional Facts:
Decision Process: This concept arises due to scarcity of resources. Since resources are limited, we have to make choices.
Production Possibility Curve (PPC): Opportunity cost is graphically represented through a 'production possibilities curve', where producing more of one good requires sacrificing some amount of another good.
Importance in investing: Investors use it to assess how much they are missing out on potential returns by investing in one asset over another.
Possible questions for upcoming exams:
What does the slope of the production possibilities curve (PPC) represent?
(Answer: Marginal opportunity cost)
If a person quits their job and starts their own business, what is their forgone salary called?
(Answer: Opportunity cost)
What is the main cause of the problem of scarcity in economics?
(Answer: Unlimited wants and limited resources)