Opportunity cost

Opportunity cost

    • The farmer has limited resources which have alternative uses. If he is using this resource on one activity, he has to forgo some other activities. If a farmer has one acre of land, he can cultivate brinjal in one acre, consequently he may not be able to cultivate other crops such as tomato, bhendi etc. Opportunity cost is defined as the earning from the next best alternative foregone. It is the value of the best alternative surrendered when a choice is made.
    Example: Net Income from three crops are

    Crops Net Income (Rs. / acre)
    Tomato 22600
    Brinjal 24600
    Bhendi 26200

    • The opportunity cost of growing Bhendi is the net income of Brinjal, i.e., Rs.24600 (next best alternative forgone). Generally, opportunity costs are included only while evaluating the economic cost of using resources. At the farm level only accounting costs are used.

Last modified: Tuesday, 26 June 2012, 4:15 AM