Explain why opportunity cost is an important concept of producers.
Answers
There are always limited resources and have unlimited wants leading to the problem of scarcity. So every decision has an opportunity cost; the next best alternative is forgone. For producers, the opportunity cost is the most valuable good or service that is not produced as a result of the decision to produce something else.
In deciding what to produce, private sector firms will tend to choose the option which will give them the maximum profit. They will also take into account the demand for different products and the cost of producing those products.
Whereas, what to produce , the government will tend to choose the option which has maximum social welfare to the society. They will take into consideration the social cost and social benefits. Let me know whether this answer was helpful to you.
The cost of foregoing up on an opportunity is known as the opportunity cost. The next-best choice is that which has been considered but not chosen. In other words, opportunity cost is the price you pay for making the wrong decision.
- A producer can evaluate the financial advantage of choosing a production activity by contrasting it with the alternative of doing no production at all.
- The same funds, time, and resources might be used toward another venture or opportunity. He can then choose the alternative that will yield him the greatest returns.
- The loss of the chance to offer another product is the opportunity cost of developing a new product.
- A producer can choose what products to make thanks to this idea. After weighing the advantages of producing product B vs product A, a producer might decide to proceed with product A.
- A producer may also calculate the implicit opportunity cost of not being able to earn pay if he works somewhere else. The value of his time and resources will be fairly conveyed.
- Returns from production and business should exceed his estimated implicit cost for him to continue in business.