Answer to Question #266148 in Microeconomics for Thelma 22

Question

Explain the term “opportunity cost”. (4 Marks)

ii) Illustrate with examples the practical importance of this concept with reference to

the individual, the firm and the state (6 Marks)

(b) Define the following with examples,

i.Economics

ii.microeconomics

iii.macroeconomics

Answer 1

Solution:

a.). i). An opportunity cost refers to the foregone benefit that would have been obtained if a different option had been chosen. It is what you have to give up to buy what you want in terms of other goods or services. 

ii.).  The concept of opportunity cost emphasizes the fundamental economic problems of scarcity and choice, and it is relevant to the behavior of individuals or consumers, firms or producers, and governments. It is a crucial concept in economics.

The individual is confronted with the problem of scarcity of resources and must make a decision. As a result, the concept of opportunity cost is relevant to him. It aids him in deciding how to allocate his limited resources. If a person has $20.00 and must choose between buying a pair of shoes and a shirt, he must buy one if his money cannot buy both. If he purchases the shoes, the true cost to him is the shirt he did not purchase.

Because producers or firms face a scarcity of resources when making decisions, the concept of opportunity cost is relevant to them. It assists business owners in determining how to best utilize available productive resources. For example, suppose a company with limited capital decides to invest in textile production rather than shoe production. The true cost to the company is the loss of shoe production.

The concept of opportunity cost is also relevant to government behavior. This is due to the government's limited resources, which prevent it from completing all of the proposed projects at the same time.

The concept assists the government in determining how to best use its revenue.

b.). i.). Economics is defined as the science concerned with the production, distribution, sale, and purchase of goods and services. The study of the stock market is an example of economics.

ii.). Microeconomics is the study of decisions made by individuals and businesses regarding resource allocation and the prices at which they trade goods and services. Microeconomics, for example, investigates how a company can maximize its production and capacity in order to lower prices and compete more effectively.

iii.). Macroeconomics is the branch of economics concerned with the overall structure, performance, behavior, and decision-making of the economy. Macroeconomics studies broad economic issues such as employment, inflation, productivity, interest rates, the trade deficit, and the federal budget deficit. The study of a country's employment is an example of macroeconomics.