Importance of Opportunity Cost to an Individual, a Firm and a Government.

Importance of Opportunity Cost to an Individual, a Firm and a Government.

Opportunity cost like other basic concepts of Economics – scarcity, scale of preference and choice is important to an individual who represents the consumer or household, or firm or productive unit and the government that form the three decision making bodies in an economy. The concept of opportunity cost arises from choice which is central to the subject-matter of economics and this arises as a result of the limited available resources vis-a-vis unlimited human wants. Since every economic problem involves choice and ever, choice involves opportunity cost, therefore Opportunity cost is very important.

Also, opportunity cost is important because it involves allocation of scarce resources to pressing areas of needs. It also shows that every activity involves a sacrifice whether on side of an individual, a firm or government. To an individual who aims at maximizing his utility from his limited available resources, he a nave to allocate these limited resources to those wants that are more important. Opportunity cost helps the individual to make judicious use of his scarce resources. For instance, an individual farmer who has a piece of land and two different types of crops like yam and cassava will plant either of them since he may not plant the two on the same land at the same time. If he grows cassava because of me present economic position of garri, the opportunity cost of cassava is the yam he has sacrificed or forgone to plant.
Opportunity cost is also important to a firm because the firm has to choose to allocate its limited available raw materials in the production of a particular product with high demand at the expense of other products with low demand in order to enable it to maximize profit.
To a government, opportunity cost helps it n the preparation of its budget. The government will therefore, decide the sector it will allocate more resources. Government may therefore, a locate more resources to education at the expense of other sectors. Opportunity cost also
aids a government in policy making. Finally, all said and done, there is an element of opportunity cost in the activities of an individual, a firm and a government.

Also read:  The three (3) core values of development in Economics

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