The Law of Opportunity Cost
The Law of Opportunity Cost
The opportunity cost is also called as alternative cost.
1) Opportunity Cost is the earning from the next best alternative sacrificed.
Example: If a pair of bullock labour earns Rs.200.00 per day on ploughing, but it can also earn Rs.250.00 per day in alternative employment of carting hence the opportunity cost of ploughing is Rs.250.00 per day i.e. the value of the bullock labour in its best alternative use.
2) The cost of production of a crop is the value of the foregone alternative crop that the resources used in its production could have produced, IS opportunity cost.
Methods of calculating Opportunity Cost:
a) Gross Income Basis: When costs of production are equal.
b) Net Income Basis: When costs of production are unequal.
a) Example – Gross Income Basis
| Sr. No | Enterprise | Gross Income (Rs.) | Cost of production (Rs.) | Net Income (Rs.) |
1 | Tobacco | 3600 | 1000 | 2600 |
2 | Potato | 5600 | 1000 | 4500 |
The opportunity cost of growing tobacco is the gross income of Rs.5600 which was sacrificed by not producing potato.
b) Example — Net Income basis
Sr. | Enterprise | Gross Income (Rs.) | Cost of production (Rs.) | Net Income (Rs.) |
1 | Tobacco | 3600 | 1000 | 2600 |
2 | Potato | 5600 | 1000 | 4600 |
3 | Wheat | 7000 | 1800 | 5200 |
The Opportunity cost of growing potato is the net income of Rs. 5200 which was sacrificed by not growing wheat.