PREPARED BY: PRIYANKA KUMARI

WHAT IS OPPORTUNITY COST?

The concept of opportunity cost is related to
alternative uses of scarce resources.
Opportunity Cost refers to expected returns from the
second best use of the resources that is foregone due
to scarcity of resources.
It is also called as “Alternative Cost”
The “opportunity cost” of a decision includes all its
consequences whether they reflect monetary
transaction or not.
EXAMPLE
Consider an individual who is an MBA & wants to invest
Rs. 200000 in a retail store that he would manage.

The projected income statement prepared by an

accountant is as shown below:
 Sales 80000
Less:Cost of goods sold 30000
Gross Profit 50000

Less: Advertising 10000

Depreciation 5000
Miscellaneous expenses 10000
Net Accounting Profit 25000

Thus the income statement should be amended in the following way in

order to determine economic profit :
 Sales 80000
Less :Cost of goods sold 30000
Gross profit 50000

Less : Advertising 10000

Depreciation 5000
Miscellaneous expenses 10000
Accounting profit 25000
Less: Opportunity cost:
Return on deposit 10000
Forgone wages 80000
Net economic profit 65000
(Accounting profit-Opportunity cost=Net Economic
profit)
From this broader perspective, the business is
projected to lose Rs. 65000 in the first year
The OPPORTUNITY COST of a commodity is not
actually any other alternative goods which could have
been produced with the same resources.
Rather , it is the next best alternative goods that
could be produced with the same resources.
PANKAJ KUMAR SINGH
MIBA 1ST SEM.
OPPORTUNITY COST
opportunity cost is the cost we pay
when we give up something to
something else. There can be many
alternatives that we give up to get
something else, but the opportunity
cost of a decision is the most desirable
alternative we give up to get what we
want.
Some examples
A person who invest 1,00,000 in stocks denies
himself the interest that he could have accrued by
leaving 1,00,000 in bank instead. The opportunity
cost of the decision to invest in stock is the value
of interest.
Now the person who sells who sells stock for
1,00,000 denies himself or herself the opportunity
to sell the stock at the higher price in the future,
inheriting an opportunity cost equal to future
price minus sales price.
Some examples
A person who desires to watch each of two
television programs being broadcast
simultaneously, can watch only one of the desired
program. Therefore, the opportunity cost of
watching 1st program is 2nd program.
If a man has just 25 rs. Then either he can buy a
tikki from McDonald or can have two glass of
mango juice. So the opportunity cost of electing
one alternative is the other product which we
have to scarifies.
APPLICATION OF OPPORTUNITY COST

The concept of opportunity cost has a

wide range of applications including:-
Consumer choice.
Production possibilities.
Use of money.
APPLICATION OF OPPORTUNITY COST

Time management.
Career choice.
Analysis of comparative advantage.
EVALUATION
The consideration of opportunity cost is one of the
key difference between the concept of economic
cost and accounting cost. Assessing opportunity cost
is fundamental to assessing the true cost of any
course of action. In the case there is no explicit
accounting or monetary cost (price) attached to a
course of action, or the explicit accounting or
monetary cost is low, then, ignoring opportunity
cost may produce the illusion that its benefits cost
nothing at all.
example m. water,b.h.u..
OPPORTUNITY COST
To get the graphical representation of how an economy
makes decisions with the help of opportunity cost
analysis on what to produce, or spend their money on,
we will use a PRODUCTION POSSIBILITY CURVE.

Production possibility curve shows the choice a country

can make with respect to its available resources.
RESOURCES
LAND:- this refers to all natural resources used to
produce goods and services. This includes crops
that are grown on land, minerals that are mined
from land and rent that is paid to the owner of the
land for its use.
LABOUR:- this is an effort that an individual
person into making a goods or services. Labor
include factory workers, medical personal,
teachers etc.
RESOURCES
CAPITAL:- this is anything that is used to produce
goods and services. If you make cars you need
machines to make the metal that is used in the cars. It
is also the truck that drives the car to the dealer who
sells them, and it is the building that the car are made
in. all of these are the resource known as capital.
Other resources are man, material.
By utilizing its maximum resources a country can produce maximum
100 mn apples or 4 mn shoes.
Now if we think a point outside the production possibility
Frontier curve.
 BY

RAHEEL GUPTA
MIBA I
The incremental principle may be stated as
follows:

A decision is clearly a profitable one if

1-It increases revenue more than costs.

2-It decreases some cost to a greater extent than it

increases others.
3-It increases some revenues more than it decreases
others.

4-It reduces costs more than revenues.

 INCREMENTAL
COST
AN INCREASE IN TOTAL COST OF PRODUCTION DUE TO A
BUSINESS DECISION IS CALLED INCREMENTAL COST.
IT INCLUDES BOTH FIXED AND VARIABLE COSTS.
THERE ARE THREE COMPONENTS OF INCREMENTAL COST

1.PRESENT EXPLICIT COST

2.OPPORTUNITY COST
3.FUTURE COST
 INCREMENTAL REVENUE

THE INCREASE IN THE TOTAL REVENUE RESULTING FROM A

BUSINESS DECISION IS CALLED INCREMENTAL REVENUE.
MARGINAL PRINCIPLE

By : Purnima Singh
 The concept of marginal value is widely
used in economic analysis.
E.g. Marginal utility in consumer analysis
Marginal cost in production analysis
Marginal revenue in pricing theory

 Marginality concept assumes special

significance where maximization and
minimization problem is involved.
E.g. Maximization of consumer utility
Maximization of a firms profit
Minimization of cost

 Term marginal refers to change ( increase or

decrease ) in total quantity or value due to a one
unit change in its determinant.
E.g. Given the factor prices the total cost of
production of commodity depends on the no. of
units produced.
MARGINAL COST
 It is defined as the change in total cost as a
result of producing one additional unit of
commodity.

MC = TCn – TCn-1

 Where TCn = Total cost of producing n units

And TCn-1 = Total cost of producing n-1units
E.g.TC of producing 100 units of a commodity is Rs
2500 & TC of 101 units is Rs 2550.
Then TCn = Rs 2550
TCn-1 = Rs 2500
MC = 2550-2500
= 50

TOTAL REVENUE :
Total revenue of firm depends on total no. of units
it sells at some point of time.
MARGINAL REVENUE:
Defined as change in TR due to the sale of one
additional unit of product.
 MR = TRn – TRn-1

Where:
TRn = Total revenue from the sale of n units.
TR n-1 = Total revenue from the sale of n-1 units.
DECISION RULE
 Suppose a profit maximizing firm faced a
problem, how much to produce so that profit is
maximum.
 One simple rule : that business activity must be
carried out until
MR > MC
 As regards profit maximizing output economists
use the marginality principle to set a necessary
condition for profit maximizing output.
 The necessary condition for profit maximizing
output is when:

MC = MR ( then profit is max )

 In simple words the profit of a firm is maximized

at that level of output where the cost of
producing one additional unit equals the revenue
from the sale of that unit of output.
LIMITATIONS:
Applied only where the management has the TC
& TR for each & every unit of output or where
the management is fully aware of the cost of
producing one additional unit & the price
expected to be received from the sale of that
unit.
The concept of marginal value when used of MC
to change in variable cost only. Therefore
marginal analysis can be applied to situation in
which only the variable cost changes.
THANK YOU