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The word cost in the context of economic production is defined as the opportunity cost of producing any good or service. It is considered to be the value that the factors of production or the resources could have generated if they were utilized for the next best use. In other words the opportunity cost is the sacrifice of the next best alternative that is made by consumption or production of a good or service. Thus when the resources are limited an individual has to make choices between the different alternatives. Accordingly by choosing one alternative he gives up the opportunity for enjoying the other remaining alternatives that he has not opted for. This is known as the opportunity cost of consumption or production. Hence it is the most important element in the context of economic that helps in the determination of the choice between the scare resource and the efficient allocation of the resources. Hence the opportunity cost is not only the money value that is given up for one particular choice but also the time costs and the psychological costs that are paid for the non-consumption of a product or service.
This can be explained with the following example. A person having $10 may decide either to buy a book or an ice cream. If the person buys a book he would have to give up his opportunity to buy the ice cream and enjoy it. On the other hand if he buys an ice cream he gives up the opportunity to read the book. In both the cases the person has to pay an opportunity cost for choosing one option over the other (Samuelson 17).
The concept of opportunity cost is used mostly in the context of production decisions. The main factors of production include capital and labor. Suppose a person works in a factory and he earns $10 per day. On the other hand he could have worked in his own farm and could have earned $ 7 a day and could have enjoyed labor for a longer time. Therefore by
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