The opportunity cost of production is an internal cost that is borne personally by the entrepreneur. They are directly related to his activities. In fact, we are talking about lost income, which could have been obtained with a more reasonable organization of the production process.
Description
Opportunity costs reflect the income a business spends. They are spent on their own production. Opportunity costs are formed in the course of choosing a development path. This is one of the fundamental concepts of modern economic theory.
Features
The opportunity cost reflects the value that can be obtained from an alternative action. In this case, the latter must be abandoned. This phenomenon arises due to the limited resources to satisfy all desires. In an ideal scheme, the opportunity cost would be zero. Such a situation is possible with unlimited resources. In practice, this is unacceptable. Thus, it turns out that the increase in opportunity costsobserved with a decrease in resources. This indicator reflects the value of the best possible option. It has to be abandoned when making an economic choice.
Resource distribution
Opportunity costs are characterized by the value of rejected opportunities. It refers to the amount of one good that has to be given up in order to increase the production of another. In reality, people are always faced with a choice. And its price is reflected in the opportunity cost. This indicator can be expressed in goods, money or hours. Let's look at how opportunity costs arise with an example. Let's say that the director of a company has to hire a certain number of management specialists. Each of these people during the day is able to perform only one type of work. The first specialist will bring the company CU 10,000, the second - 8,000, the third - 6,000. The director hires two employees. In this case, the opportunity cost is CU6,000
Counting
A rational person needs to consider future costs. He should also calculate the costs of various unused opportunities. As a result, it will be possible to make the optimal economic choice. Mankind is learning to distribute efforts and resources. The goal is to fully satisfy a wide range of personal needs. Finding the means to accelerate the growth of welfare indicators is incredibly difficult. Economic history has allowed mankind to understandthat nothing comes for free. Every choice has a price. It is expressed in the refusal to implement the most desirable of the alternatives. The described truth is essentially universal. However, in the economic sphere, it can be seen especially clearly. Let's go back to the example. If there is a consistent involvement in the production process of an ever-increasing amount of less suitable resources, costs are constantly rising. Note that the described principle is not universal. If resources are completely fungible and are used with equal efficiency to produce goods, the graph that reflects this situation becomes a straight line. This option is hypothetical and does not occur in practice in its pure form. So, we have established that the resources that are used in the production of two different goods do not have complete interchangeability. The growth of opportunity costs is reflected in the degree of convexity of the resulting graph. Society is constantly trying to overcome the contradiction between the need to meet growing needs and limited opportunities. The latter are directly related to the development of productive forces. The form of resolution of the described contradiction is economic growth. One of its components is the increase in labor productivity indicators. The social division of work is a qualitative differentiation of activity. It assigns producers to certain types of work. Specialization is a form of division of labor. Economists have found that it is specialization that leads to growth efficiency and productivity. Here we arefigured out how opportunity costs are formed.
