What Is Marginal Opportunity Cost?
Marginal opportunity cost is a expression used to describe the fusion of two economic terms: opportunity cost and marginal cost. Opportunity cost refers to a system of measuring the cost of something in consideration of what must be given up in order to achieve it. Marginal cost is the additional cost associated with the decision to produce extra units of a product. As such, marginal opportunity cost is the measurement of the opportunity cost for the production of extra units of goods.
This concept applies to the cost of business decisions in which one item must be sacrificed for something else. For example, a company may produce 10,000 units of pens in eight hours per day. If the managers of the company decide to increase the production of the pens to 12,000 units per day, the cost can be calculated by using the marginal opportunity cost concept. In this case, it will include considerations about the overtime that would be paid to the workers or extra hours that must be added to the work shifts in order to meet the increase. It will also include a calculation of the cost for the extra materials needed to produce the pens.
Apart from business or economics, this measurement may also be applied to personal decisions. For instance, a young boy might have $50 US Dollars (USD) in his pocket that is supposed to last him for a week. Assuming the boy has a craving for some ice cream and buys one for $5 USD, this would reduce the income he has to spend for the rest of the week to $45 USD. If he decides to buy another ice cream cone for $5 USD, this would further reduce his income to $40 USD. The opportunity cost for the first ice cream is $5 USD, while the marginal opportunity cost for the second ice cream cone is $5 USD.
Another way of further illustrating the concept using the above example is to imagine that the boy could comfortably afford the first $5 (USD) spent on the ice cream, but had to sacrifice his bus fare for the second one. In this case, the cost for the second ice cream is greater than that for the first one: the second ice cream not only cost him an extra $5 (USD), but it also cost him his ride home, which he had to make up for by walking.
I have to do a cost benefit analysis assignment for class.
As far as I understand from this article and my class notes, it's not enough to just find marginal opportunity cost of additional production right? Do I need to think about alternatives and figure out marginal opportunity costs for those?
How do real companies decide to produce more or less? How many alternatives and marginal opportunity costs do they consider?
@anamur-- Total opportunity cost is all the marginal opportunity costs added together.
Like in the example given in the article about the boy spending money, the total opportunity cost would be the combination of the marginal opportunity cost for the first and second $5 that the boy spent.
So to find out total opportunity cost, you must find the marginal opportunity cost for each extra unit and then add them together.
What is the difference between marginal opportunity cost and total opportunity cost?
Post your comments