Concept of the Opportunity Cost
Definition: Opportunity cost of the satisfying a want is the other best alternative which has to be forgone. (i.e. the cost of giving up something in order to attain something else.)
E.g. A person has $5 and he can them spend on the chocolate or chewing gum or the combination of both of them.
Price of a bar of the chocolate is = $0.50
Price of a bar of the chewing gum is = $0.20
Chocolate Chewing gum
10 0
8 ?
6 ?
4 ?
2 ?
0 25
There are 6 possible combinations available to him using all his money. Supposing that he is consuming 6 bars of the chocolate and 10 bar of the chewing gum, the opportunity cost of the 8th bar of chocolate is what he should give up in order to get the 8thbar, which in this case is 5 bars of chewing gum. (10-5)
The line on the above drawn figure shows a constant opportunity cost of consuming 2 additional bars of the chocolate is 5 bars of chewing gum.
Opportunity cost is represented by slope of that line.
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