(a) Explain the term opportunity cost.
(b) Highlight the relevance of the opportunity cost concept to individuals, firms and government.
(a)Opportunity cost means the alternative forgone in order to satisfy a particular want. It refers to the satisfaction of one want at the expense of another want. It arises as a result of scarce resources to satisfy numerous wants and desires, e.g. the opportunity cost of purchasing a textbook, to a student, is the shirt he should have bought which he sacrificed to get the textbook. Opportunity cost means real cost and it is different from money cost. The real cost of the text-book is the shirt forgone.
(b)(i)Importance of opportunity cost to individuals: It helps individuals to make judicious use of their scarce resources to satisfy unlimited wants. For example, a farmer can use a piece of land for planting cocoa or coffee. If he grows cocoa because of the present economic value of cocoa, the opportunity cost of cocoa is the coffee forgone.
(ii) Importance of opportunity cost to the Government: It helps the government in deciding which sector will receive more resources. It helps the government in making decision on how to spend its revenue in carrying out its numerous projects, e.g. the government may allocate more resources to defence or infrastructure.
(iii) Importance of opportunity cost to the firms: It helps the firms or industry in making decision on which resources to use in production and the method of production to be used, i.e. capital intensive or labour intensive.
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