Importance of Opportunity Cost as Related to Individual, Firm and Government Lesson Note
This SS1 Economics lesson note covers Importance of Opportunity Cost as Related to Individual, Firm and Government for First Term, Week 4.
Learning Objectives
- At the end of the lesson, students should be able to:
- 1. Define opportunity cost.
- 2. Explain the importance of opportunity cost.
- 3. State the importance of opportunity cost to an individual.
- 4. Explain the importance of opportunity cost to a firm.
- 5. Explain the importance of opportunity cost to government.
- 6. Give practical examples of opportunity cost.
Lesson Note
A. Meaning of Opportunity Cost
Opportunity cost is defined as an expression of cost in terms of forgone alternative it is the satisfaction of one's want at the expense of another want
Example:
If a student has ₦1,000 and chooses to buy a textbook instead of a school bag, the school bag is the opportunity cost or real cost or true cost of buying the textbook, assuming it was the next best alternative. While the one you spend money on is the money cost
B. Importance of Opportunity Cost to an Individual
Opportunity cost is important to an individual in the following ways:
1. It helps in making rational choices: It enables individuals to compare alternatives before making decisions.
2. Efficient use of scarce resources: it also assist individuals to make maximum use of scarce resources relative to their unlimited wants
3. It helps to identify the best alternative: A person considers what must be sacrificed before choosing an option.
4. It encourages careful spending: Individuals become more conscious of the consequences of their choices.
5. It helps in planning: People can plan their time, money and other resources effectively.
6. It helps to reduce waste: Scarce resources are directed towards their most valued use
C. Importance of Opportunity Cost to a Firm
Opportunity cost is important to a firm because:
1. It assists in rational decisions: it assists the firm to make rational decisions about production process
2. Techniques of production: it also help manufacturing industries in deciding the techniques of production i.e whether to adopt capital or labour ntensive method of production
3. It helps to maximize profit: The firm can choose the alternative that is expected to provide greater benefits.
4. It guides production decisions: A firm can determine which goods or services to produce.
5. It promotes efficient use of resources: Resources are not unnecessarily committed to less productive activities.
Example
If a firm uses its ₦10 million to establish a bakery instead of a furniture factory, the benefits that could have been obtained from the furniture factory represent the opportunity cost.
D. Importance of Opportunity Cost to Government
Opportunity cost is important to government because government has limited resources but many competing needs.
1. It helps in budgeting: Government can decide how to distribute limited revenue among different sectors.
2. Decision making process: it helps the government in making certain decisions eg, the priority areas that may require immediate attention such as medical , education
3. It assists in development planning: It helps government choose projects that provide greater benefits to society.
4. It encourages efficient use of public funds: Scarce government resources are allocated carefully.
5. It helps in policy decisions: Government considers the alternatives sacrificed when adopting a policy.
Example
If the government uses ₦50 billion to construct roads instead of building hospitals, the benefits that could have been obtained from the hospitals represent the opportunity cost of constructing the roads.
Evaluation
OBJECTIVES QUESTIONS
1. Opportunity cost is the value of the ______ alternative forgone when a choice is made.
A. first
B. next best
C. cheapest
D. most expensive
2. Opportunity cost helps an individual to make ______ decisions.
A. careless
B. irrational
C. rational
D. political
3. One importance of opportunity cost to an individual is that it helps in the proper allocation of ______.
A. income
B. population
C. weather
D. government
4. A firm considers opportunity cost when deciding how to allocate its scarce ______.
A. resources
B. customers
C. laws
D. population
5. Opportunity cost helps a firm to make better ______ decisions.
A. investment
B. religious
C. family
D. political
6. One major importance of opportunity cost to a firm is that it helps to ______ profit.
A. reduce
B. maximize
C. eliminate
D. postpone
7. Government uses the concept of opportunity cost mainly because public resources are ______.
A. unlimited
B. free
C. scarce
D. unnecessary
8. Opportunity cost helps government to set ______ among competing needs.
A. prices
B. priorities
C. salaries
D. taxes
9. If government spends money on road construction instead of building a hospital, the hospital project represents the ______.
A. profit
B. revenue
C. opportunity cost
D. fixed cost
10. Which of the following is an importance of opportunity cost to government?
A. It encourages waste of resources
B. It helps in effective budgeting and planning
C. It eliminates scarcity
D. It increases unlimited resources
Theory Questions
1a. What is opportunity cost?
1b. State four importance of opportunity cost to an individual.
1c. Mention four importance of opportunity cost to a firm.
2a. State four importance of opportunity cost to government.
2b. Give one example of opportunity cost relating to an individual.
2c. Give one example of opportunity cost relating to a firm.
2d. Give one example of opportunity cost relating to government