There is always a cost of having an additional unit of one good in terms of the amount of other good. This is called Opportunity Cost of an additional unit of the good.
Production Possibility Schedule
Possibilities |
Good X |
Good Y |
A |
1 |
10 |
B |
2 |
8 |
For producing an additional unit of X, 2 unit of good Y are sacrificed. Therefore, the opportunity cost is 2 units of Y.
Detailed Answer:
Opportunity Cost is the value of a factor in its next best alternative use. It can be explained with the help of Production Possibility Schedule, which is given below :
Production Possibility |
Good X |
Good Y |
A |
0 |
20 |
B |
1 |
17 |
C |
2 |
13 |
D |
3 |
8 |
At combination B, in order to produce one unit of Good X, 3 units of Good Y are sacrificed. At combination C, for producing another unit of Good X,4 units of Good Y are sacrificed. Similarly, at combination D,5 units of Good Y are sacrificed. Thus, at combination B, Opportunity Cost is 3 units of Good Y for one more unit of Good X, at combination C, the Opportunity Cost is 4 units of Good Y for one more unit of Good X; and at combination D, Opportunity Cost is 5 units of Good Y for one mole unit of Good X.