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 8^th bar of chocolate is what he should give up in order to get the 8^thbar, 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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