Question

The theory of production costs is based on the idea of economic profit in which profit is defined as the difference between revenue and total costs, with total costs being the sum of implicit and explicit costs. Under these conditions, can we assume that the opportunity cost is an absolute concept, not a relative one? Justify your answer

Answer 1

Answer:

• No, we cannot assume that the opportunity cost is an absolute concept, not a relative one.
• Opportunity Cost is a relative concept. The main economic problem is the problem of choice. Human wants are unlimited but the resources to satisfy those wants are limited and these resources have alternative uses. Thus, a person has to choose between two alternatives to satisfy his/her want.
• Opportunity cost is the overlooked gain that an alternative not selected would have derived.
• The Costs and advantages of each available alternative must be evaluated and measured against the others to better assess opportunity costs.
• Opportunity Cost = Next best alternative forgone
• For example, in the below diagram, the opportunity cost of studying economics is the time spent on studying English. If you study Economics an extra 3 hours. the opportunity cost is 3 hours of studying English that you cannot have.

• Explicit Costs  

Explicit Costs are costs of opportunity that requires producers' direct monetary payment. The explicit opportunity cost of the output factors that a producer does not already own is the price that the producer has to pay for them.

• Implicit costs  

Implicit Costs are the cost of opportunity that is not expressed in the cash outflow but inferred by the company's decision not to allocate its current (owned) capital or production factors to the best alternative use.