Explain the meaning of opportunity cost …

The resources in an economy are scarce and they have alternate uses. A resource can be utilised in only one alternative. That means the best alternative is to be chosen. In doing so, we have to sacrifice the other alternatives. Thus, Opportunity cost of any commodity is the amount of other good which has been given up in order to produce that commodity. Alternatively opportunity cost of a given activity is the value of the next best activity.

Production Possibility Schedule

Initially at combination B, in order to produce one unit of X, the economy has to sacrifice one unit of Y. So, at combination B, opportunity cost is 1 unit of good Y which is sacrifice. . At combination C, for producing additional unit of commodity X, the economy has to sacrifice 2 units of commodity Y. So, at combination C, opportunity cost is 2 units, Similarly, at combination D, for producing additional unit of commodity X, the economy has to sacrifice 3 units of commodity Y. So, at combination C, opportunity cost is 3 units and so on.