You have ₹ 1,000 as your pocket money. You can deposit this money in a bank and get ₹1,100 after
an year. However, you have two other choices:
(i) lend this money to your friend who is ready to pay you ₹1,050 after an year, or
(ii) keep the money with you as cash in hand.
What is opportunity cost of keeping the money as cash in hand?
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Opportunity cost of production of a commodity refers to the cost which the producer has to sacrifice in terms of the next best alternative which could be produced out of that cost in order to produce every unit of the given commodity. Therefore, the cost of keeping Rs. 1000 as cash in hand will mean a sacrifice of Rs. 100 which we would have got on depositing the money into bank.
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