Question

How does opportunity cost reflect scarcity?

What does it have to do with decision-making?

Answer 1

Opportunity cost reflects a trade-off between two goods. It represents the amount of one good that has to be given up in order to consume one additional unit of another good, or the benefit foregone by choosing one alternative over another. This trade-off arises because resources and goods are scarce, and are not available in unlimited quantity. Therefore, to consume or use one more unit of one, some units of another has to be sacrificed.

Opportunity cost comprises a portion of total economic cost of decision making. Therefore, in the decision making process, it assumes importance because the decision which yields the lowest opportunity cost should be chosen.