Cost Of Production and Concept of Revenue — Economics STD 11 Commerce — Question
Gujarat BoardEnglish MediumSTD 11 CommerceEconomicsCost Of Production and Concept of Revenue3 Marks
Question
State the limitations in measuring opportunity cost.
✓
Answer
Opportunity cost:
The concept of opportunity cost was presented by Austrian economist but it was properly presented by Marshall. We know that the means of production have alternative uses i.e. more than one use. The concept of opportunity cost is based on the particular characteristic of factor of production which says that when a factor is used for a particular use, the other use is left out or the same cannot be used for other purpose. Under such circumstances, the best alternative which remains is the opportunity cost of production.
If a factor of production is used in the production of one commodity which seems the best, the next best or say the second best alternative is left out.
Assuming the best choice is made, opportunity cost is the ‘cost’ incurred by not enjoying the benefit that would have been had by taking the second best available choice
Example:
$(a)$ If someone is producing wheat on one piece of land, then at the same time on the same piece of land other food grain (crop) cannot be produced.
$(b)$ A worker working in textile mill cannot at the same time work in any other industry.
Suppose if wheat is produced on a piece of land one can earn an income of $₹ 2$ lakh can be earned and if rice is produced the income of $₹ 3.5$ lakh can be earned.
The farmer decides produce rice in which he earns more.
So, to get the income of $₹ 3.5$ lakh from the production of rice, farmer loses out income of $₹ 2$ lakh from the production of wheat. This left out income of $₹ 2$ lakh from the production of wheat is called the opportunity cost of $₹ 3.5$ lakh earned from the production of rice.
Problems in measuring opportunity cost:
$(I)$ Factors with one use:
If a factor of production has only one use then its opportunity cost cannot be decided.
Example:
$(a)$ Suppose if a piece of land is used only to produce grass so far than we cannot calculate the opportunity cost of that land.
$(b)$ The same applies for a person who is currently unemployed. Since the person does not have any work how can we calculate alternative cost?
$(II)$ Factors having specific use:
If factors of production have only a specific use then the concept of opportunity cost is not useful. Returns of these factors are not decided by their alternative uses but on the basis of their demand.
Example:
$(a)$ Persons having expertise over computers, scientist having knowledge of atomic power, etc. These people do not know any other work except their own.
$(b)$ Machine for making ice can only produce ice i.e. it has no alternative use and so no opportunity cost is involved.
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