Question 20. Explain the theory of opportunity cost principle.
Answer 20. The concept of opportunity cost was first developed in 1914 by Friedrich Von Wieser in his book , "THEORIE DER GESELLSCHAFTLICHEN WIRSTSCHAFT " opportunity cost is the cost of any activity measured in terms of the value of the best alternative that is not chosen ( that is foregone) . It is the sacrifice related to the second best choice available to someone the opportunity cost is also the cost of the forgone products after making a choice.
The opportunity cost of the commodity is the amount of a second ( alternate) commodity that must be given up in order to release just enough factors of production to be able to produce one additional unit of first commodity . Opportunity cost is the key concept in economics and has been described as expressing "the basic, relationship between scarcity and choice " .
Thus opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone , lost time , pleasure or any other benefits thay provides utility should also be considered opportunity costs.
ASSUMPTIONS :
1.Here there is only one factor of production, labour.
2. Labour is homogeneous.
3.labour is perfectly mobile within the country and immobile outside the country.
4. Free trade exist between the country.
5. Countries are free from transportation cost.