Maximum and minimum opportunity costs. Opportunity Cost of Production

Opportunity Cost- this is the income lost by an economic agent as a result of making any decision (although something else could be taken). The opportunity cost of a good or service is the cost of goods and services that had to be given up in order to be able to purchase these goods.

Law of Increasing Opportunity Cost

The Law of Increasing Opportunity Cost states that in a full-employment economy, as production of one good increases by one unit, more and more of another good must be sacrificed. In other words, the production of each additional unit of good Y is associated with the loss of an increasing amount of good X for society.

The effect of the law of increasing opportunity costs is explained by the specifics of the resources used. The production of alternative goods uses both general-purpose and specialized resources. They vary in quality and are not completely interchangeable. A rationally acting economic subject will first involve in production the most suitable, and therefore the most efficient resources and only after they are exhausted - less suitable. Therefore, when producing an additional unit of one good, universal resources are initially used, and then specific, less efficient resources are involved in production, which can only be partially used.

In addition, in the production of alternative goods, consumption rates for the same materials differ significantly. In conditions of scarcity and lack of interchangeability of resources, opportunity costs will increase as the production of an alternative good expands. If any unit of input were equally capable of producing alternative goods, then the production possibilities curve would be a straight line.

Synonyms

Opportunity costs

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4.1 Opportunity costs

The concept of opportunity cost is probably the most important in modern economic analysis. As will be shown in the following chapters, almost all ideas modern economy, ranging from supply and demand, to more complex models (for example, discounted payments) are based on the inclusion of opportunity costs in the analysis.

As previously defined, economics is the study of how people interact in response to incentives in the process of managing scarce resources (or, you know, how limited resources are distributed among alternative uses). To achieve their goals and desires (this can go far beyond maximizing profit or utility) in a world of limited resources, people need to make choices that respond correctly to the incentives offered. Because we live in a complex and diverse world, to achieve a goal, there are, as a rule, several competing options for economic behavior. The decision maker is faced with a choice between several alternative options, weighing the pros and cons of each option 1 . This approach to decision making, which is done by all of us everywhere, often with the help of intuition, is reflected in the economic concept of opportunity costs. The idea of ​​calculating opportunity costs assumes that an individual can compare available alternatives based on their value to him and choose the best one.

Opportunity costs are the result of comparing the chosen option of economic behavior with the most optimal available option. You may come across the definition of “opportunity cost.” The value of lost opportunities is precisely the result of comparison given choice with the best available option. Thus, the opportunity cost of a given economic decision can be calculated as the difference between the economic outcome of the best available alternative and the outcome of the given decision.

Opportunity cost = outcome of the best alternative – outcome of the chosen alternative

The following example will help you understand this simple definition.

Of course, this example is as simplified as possible. In a number economic tasks it is proposed to take into account additional factors, such as the monetary value of time spent or the monetary value of qualitative differences between alternatives 2 .

This elementary example illustrates several important properties economic choice:

1. A choice is optimal if its opportunity costs are minimal. A rational economic agent minimizes opportunity costs.
2. Opportunity costs cannot be less than zero.

These properties can be easily obtained from the definition of opportunity costs. Since they are the difference between the economic result of the best choice option and the given choice option, the smaller this difference, the “closer” the individual is to making the optimal decision. Since the calculation of opportunity costs uses a comparison with the best economic result (that is, the maximum in terms of economic benefits), this difference cannot be less than zero. If the opportunity cost is zero, this means that the option being considered compares to itself and is therefore the best.

1 The problem of choice is reflected in the well-known saying among economists: “There is no such thing as a free lunch.” This means that when goods are provided to someone for free, this means that someone else paid for them (and perhaps, in part, that person himself, without knowing it). For example, such as free education or fire protection are provided at the expense of taxpayers. Or, if a person decides to repair the car himself, then his costs will be lost opportunities to earn money at this time.
2 But, as said earlier, economists love simplifications (called models). Economics allows us to talk about the world around us (at least its economic part) specific language, mostly in the language of models. Economics has one goal: to understand our own world and make it better. But in order to do this, economists have to consciously simplify the real state of affairs and draw conclusions about the laws of the surrounding world using simple models as examples. Models do not have to be realistic to draw useful conclusions.

In economic literature and journalism you can often find the term “opportunity costs” (synonyms: “lost opportunity costs”, “lost profit costs”, “opportunity costs”, “opportunity costs”). Many serious economists call opportunity costs the most important concept on which almost all economic models of our days are based: from global theoretical to applied ones that have direct practical use in one or another market area.

What is opportunity cost

There are a number of definitions of this concept. Some of them are given below. Opportunity costs are the lost profits when choosing one of the options for using certain economic resources while simultaneously abandoning other options. Lost profits are ultimately expressed in income, the monetary equivalent. Its volume is determined by comparing the selected option with the most valuable of all those available to the individual.

In short, opportunity cost is something that is given up in order to obtain what one wants at the moment.

This type of costs is also described as the amount of material goods in the production of products that an economic agent refuses when making this or that choice, the lost income of this agent.

To summarize, we can say that opportunity costs are characterized by:

• some standard comparative value (it is also called “benchmark”, i.e. “measure”, “criterion”, from the English “benchmark”);
• the amount of lost benefits.

This type of costs is not taken into account in accounting and financial accounting, since they are not actually accomplished in real time. This is an estimated, calculated value. The essence of actual costs is production costs. The essence of opportunity costs is lost profit.

In addition to cash when counting specified type other cost indicators may be used:

• natural – the number of product units that will not be produced as a result of choosing one of the options;
• temporary – the amount of time lost during the implementation of the chosen option, compared to the most profitable one.

On a note! The characteristics of alternative (opportunity) costs are also contained in some regulations. For example, Guidelines on management accounting at agricultural enterprises (Prospect of the Ministry of Agriculture No. 792 dated 06-06-03) defines them as lost profits from the alternative use of capital investments in turnover.

Opportunity Costs and Economic Theory

Opportunity costs (AC) can be represented by the formula:

AI = RL – Rv, Where:

• RL – economic result of the best available course of action;
• Рв – economic result of the chosen action.

Let's explain with a simplified example. Suppose, when looking for a job, the applicant received three offers: the first - with the prospect of an income of 35,000 rubles per month, the second - 45,000 rubles per month, the third - 40,000 rubles per month. The benchmark here will obviously be the second proposal. Its result is most beneficial to the applicant.

If he chooses the first option, then AI = 45,000 - 35,000 = 10,000 rubles, if the third, then AI = 45,000 - 40,000 = 5,000 rubles. The resulting figures are the lost profit of the applicant for the position, expressed in monetary terms. When choosing the second option, obviously, the AI ​​will be equal to zero. Wherein negative meaning AI makes no sense, does not exist.

Note that the above model does not take into account all factors that determine choice.

So, in addition to financial ones, the time criterion may be important for the applicant (the shorter the road to the office, the more more resource free time) etc.

The schemes become more complex depending on the purpose of the calculations, their volumes, and the degree of detail of the data. If an economic agent, an individual in a situation of choice, is understood not as an individual, but as an economic entity, opportunity costs can be divided into

• explicit;
• implicit.

First group– this is in the form of monetary AI, i.e. wages, purchase of fixed assets, goods and materials, payment for services third party organizations. They combine payments to factor suppliers: work force, means of production, etc.

Second group- these are the costs of resources available in the company itself that do not require payment:

• profit lost as a result of the choice;
• the amount of income from investments in securities, which were not implemented;
• the level of normal profit, a fall in which may force an entrepreneur to leave a certain market segment;
• shortfall in rental payments as a result of a decision not to lease the land or to lease it to another partner who offered a lower rent, etc.

Law of Increasing Opportunity Cost

The formation of opportunity costs is described by the law of increasing AI. Its essence is as follows: the production of each additional unit of a good, work, service, or any public good simultaneously leads to the loss of units of another public good in ever-increasing quantities. In other words, if the production of one good increases, then the production of another good decreases. The law operates in a model described as a full employment economy.

The effect of this economic law is directly related to the resources consumed in the process of producing goods. Their nature and quality are different; it is impossible to completely replace one resource with another.

The principle of rationality operates in economics. An individual first of all uses in the production of goods the resources “lying on the surface” that give the greatest effect. Once they are exhausted, less suitable resources are used. The first group is, as a rule, universal, suitable for production various types benefits, and the second is specific, its use is difficult. Therefore, than large quantity units of public good are produced, the higher the AI. Note that the consumption of the same type material assets for the production of different types of goods cannot be exactly the same.

Thus, if resources are limited and their interchangeability is not fully possible, with an increase in production alternative types public good AI will strive to grow.

The law is described by the so-called production possibilities curve. If we imagine that any unit of resources can be used to produce any type of alternative goods (the opportunity costs are constant), then the curve will take the form of a straight line. Using this curve, they describe both the law of increasing AI and certain economic processes (unemployment level, full employment, growth of economic indicators, level of efficiency in the use of resources, etc.).

Application of opportunity cost theory

Already mentioned above simplest example the choice of an individual in the job search process, as well as macroeconomic phenomena from the point of view of the theory of opportunity costs.

Let's look at one more clear example. Let’s say that at the end of the year, a manufacturing company received an income of 520 million rubles, the costs of production amounted to 480 million rubles. The profit was: (520 – 480) = 40 million rubles.

During the same period, the company's management came up with the idea of ​​​​transitioning to the production of another type of product. The economic service calculated the estimated costs and income from production: 550 million rubles and 585 million rubles, respectively. When switching to the production of another type of product, the profit could be: (585 - 550) = 35 million rubles. Estimated profit in in this case represents opportunity costs - 35 million rubles.

The actual profit received is greater than the calculated value, the actual profit minus AI is higher than zero. From the calculations it follows that the company chose the most profitable option out of two possible ones.

Main

1. Opportunity costs are the amount of lost profits when choosing one or another option in business.
2. Opportunity costs obey the law of increasing. Its essence is that when producing one additional unit of any public goods, society has to give up the production of some part of alternative public goods. This law is based on the heterogeneity and limitation of any resources in a full employment economy.
3. The theory of opportunity costs is used in both macro- and microeconomic models, as well as in the practical activities of individual market participants.

In any case, the choice of some economic good implies the refusal of another economic good.

If a schoolgirl, whose parents gave her a certain amount of money, would like to go to a disco and update her outfit, but there is not enough money for both, then she has to sacrifice something. Let's assume that a schoolgirl decides to have fun with her friends at a disco. The refusal of a new outfit in this case was the price of her choice, or the alternative costs of the choice made.

If the management of a firm decides to purchase five expensive cars to enhance the prestige of its president and vice presidents, and refuses to purchase the latest equipment, then the new equipment is opportunity costs purchased cars.

In both cases, the opportunity cost is the product not purchased that is rejected by the buyer who chooses another product or service.

Opportunity costs can also have a direct monetary value.

Let's assume that a graduate high school decided to enroll in a paid department at economic university. What would be the opportunity cost of training him? To determine them, it is necessary to take into account only those monetary expenses that are associated with paid training and that could have alternative uses. These expenses should include: the tuition fee itself, the cost of purchasing textbooks, travel expenses to educational institution and home. If the student were not studying at a paid department of the university, he could use this money in other ways, for example, on travel. At the same time, some expenses (for food, buying clothes, hairdresser services, etc.) should not be included in opportunity costs, since they do not depend on whether our hero is studying or traveling.

Opportunity Cost Principle can be extended to the economy as a whole. For example, the government must calculate the opportunity costs of decisions in the field of rearmament of the army, increased costs of maintaining the state apparatus, etc. In practice, any economic entity has the opportunity to choose between several options for satisfying certain needs.

Our schoolgirl had a wide choice at disposal of her money: she could contribute money for a trip with the class on an excursion, go with younger brother to a water park, etc. However, from her point of view, the best of the rejected options is refusing a new outfit. Both the management of the company and the government of the country may face a similar multivariate choice.

Therefore, the opportunity cost of choosing a particular good or service will not be all the goods or services that must be given up in order to acquire the good or service that is preferred.

The choice is made not according to the principle - “this product/service or all others”, but “this product/service or the next, best one, from the point of view of the one who makes the choice.”

Hence, opportunity cost are determined THE BEST OF THE REJECTED OPTIONS.

Opportunity cost, opportunity cost, or opportunity cost (English: Opportunity cost(s)) is an economic term denoting lost benefit (in a particular case, profit, income) as a result of choosing one of the alternative options for using resources and, thereby, refusing other possibilities. The value of lost profits is determined by the utility of the most valuable of the discarded alternatives. Opportunity costs are an integral part of any decision making.
Opportunity costs are not expenses in the accounting sense, they are just an economic construct for accounting for lost alternatives.
If there are two investment options, A and B, and the options are mutually exclusive, then when assessing the profitability of option A, it is necessary to take into account the lost income from not accepting option B as the cost of a lost opportunity, and vice versa.
Opportunity "explicit" and "implicit" costs
The majority of production costs comes from the use of production resources. If the latter are used in one place, they cannot be used in another, since they have such properties as rarity and limitation. For example, money spent on buying a blast furnace to make iron cannot be spent on producing ice cream at the same time. As a result, by using a resource in a certain way, we lose the opportunity to use this resource in some other way.
Due to this circumstance, any decision to produce something necessitates the refusal to use the same resources for the production of some other types of products. Thus, costs represent opportunity costs.
Opportunity costs are the costs of producing a good, assessed in terms of the lost opportunity to use the same resources for other purposes.
Opportunity Cost Curve

In conditions of limited resources, it is impossible to increase the consumption of one good without reducing the consumption of another good. Suppose: goods X and Y are produced in society.
The production of additional units of product X can be achieved by using a certain set of production factors. But due to limited resources, this number of factors will not be used to produce goods Y. Everything that society could have received, but due to limited resources, did not receive and missed this opportunity is the cost of lost opportunity. If three units of Y must be given up to produce X, then these three units not produced determine the opportunity cost of producing a unit of X.
The value of lost opportunity costs (opportunity costs) is the monetary proceeds from the most profitable of all alternative uses of resources.
Limited resources give rise to fundamental economic problem choice: what goods and services a society should produce with a limited amount of land, labor and capital.
RATIONAL CHOICE
is a choice that is made based on a comparison of the benefits and opportunity costs of any decision. In this case, those actions are selected that are most economically beneficial - i.e. bring the greatest benefits compared to costs
MARGINAL COST
- additional costs for applying additional effort (or producing an additional unit of output, if this unit can be measured quantitatively).
MARGINAL BENEFITS
- additional benefit from applying additional effort (or profit from selling an additional unit of product).
A visual representation of the problem of limited resources and the need for choice is provided by the production possibilities curve.

The principle of comparative advantage means that even in the absence of absolute advantages (lower absolute production costs for all goods), a country can profitably and effectively participate in world trade. To do this, it is necessary to have relatively, that is, comparatively lower costs for some goods. Then the country will have a comparative advantage in these goods. Specialization based on the principle of comparative advantage contributes to more efficient allocation and use of resources, improving the level and quality of life of the population, and ultimately dynamic economic growth.

The history of the appearance of the concept in Russian economic vocabulary is connected with the work of the great English economist David Ricardo and with the translation of English comparative advantages into Russian.

Comparative from Latin compare- connect, associate, which follows from com- (together) + par equal, identical; identical. In the primary sense, a more accurate translation of English compare- to put on an equal footing, to compare, to compare, to distinguish. This etymological excursion allows us to more accurately determine the relationship between the concepts of comparative advantage and competitive advantage, as well as the content of the conclusion that comparative advantage is the basis of competitive advantage (see competition).

The principle of comparative advantage as a basis international trade

It is obvious that international trade develops because it brings benefits to the countries participating in it. What lies behind this gain from international trade? The main prerequisite for the emergence of any market is the division of labor. This is also true for the global market. As was clarified above, in the case of the world market and international trade we are talking about the international division of labor, entailing international cooperation of labor, i.e., intercountry exchange of material goods. The international exchange of goods and services, which is based on MRI, is mutually beneficial for all countries participating in the world market. International trade is a means by which countries, by developing specialization, can increase the productivity of existing resources and thus increase the volume of goods and services produced and increase the level of welfare. The above thesis also has a theoretical justification - the principle of comparative advantage, which was formulated by David Ricardo.

The theory of comparative advantage operates on the concept of opportunity cost. Alternative price - work time, required to produce a unit of one good, expressed in terms of the labor time required to produce a unit of another good. In our example, the alternative price of goods 1 (opportunity costs) will be A1/A2 for country I, and A1/A2 for country II, where A1 and A2 are the time required to produce goods 1 and 2 in 1, respectively. th country. Indicators with “shades” will reflect the situation in country II.

So, the theory of comparative advantage - if countries specialize in the production of those goods that they can produce at a relatively lower cost than other countries, then trade will be mutually beneficial for both countries, regardless of whether production in one of them is absolutely more more effective than the other.

For your information. If it turned out that A1< A1", а А2" < А2, то можно было бы констатировать, что страна 1 имеет абсолютное преимущество в производстве товара I, поскольку на производ­ство этого товара в стране I затрачивается меньше времени, чем в стране II, а страна II по аналогичным причинам имеет абсо­лютное преимущество в производстве товара 2.

If A1/A2< А1"/А2", это означает, что затраты на производст­во товара I, выраженные через затраты на производство товара 2 в стране I ниже, чем аналогичный показатель для страны II. Следовательно» 1st country will export product I to country II, while country II will sell product 2 on the world market.

Let's consider the situation with comparative advantages using the example of two countries, England and Portugal, and two goods - cloth and wine. Information on the production of these goods in the closed economies of England and Portugal is presented in columns 2-4 of the table.

Time to produce a unit of cloth and a unit of wine in England and Portugal

At first glance, international trade for England is beneficial from all points of view, since the absolute advantage in the production of both goods 1 and goods 2 here belongs to Portugal, i.e. 40< 60, и 45 < 50. Для Португалии ситуация выглядит сложнее. Португалия обладает абсолютным преимуще­ством и в производстве вина и в производстве сукна - (A1 < А1"), (А2 < А2"), однако A1/A2 < A1"/A2" (40/45 < 60/50). Это означает, что относительное (сравнительное) преимущество в производстве вина принадлежит Португалии, а относительное преимущество в производстве сукна - Англии, т. е. для Португалии имеет смысл специализироваться в производстве вина, а для Англии - сукна, поскольку А2"/A1" < A2/A1 (50/60 < 45/40), что в конечном итоге обеспечит выгоду для обеих стран. Если Португалия откажется от производства сукна и увеличит объем производства вина до двух единиц (причем 2-ю единицу вина она будет обменивать на 1 единицу сукна, на производстве которого специализируется Англия, отказавшаяся от производства вина), то затраты Порту­галии сократятся с 85 до 80 часов (2 х 40), а Англии - с 110 до 100 часов (2 х 50). Общие же затраты на производство данного объема продукции сократятся на 15 часов (195-180).

Such an exchange is beneficial for both countries, since the countries’ needs for both wine and cloth will be satisfied at the same level, but labor costs for the production of a given volume of products will be reduced. The theory of comparative advantage is valid for any number of countries and any number of goods. It is still, despite clarifications and additions and other theories of international trade, the prevailing concept, clearly proving the existence of gains from world trade for all countries participating in it.

Production possibility curve(transformation curve) ( Production possibility curve) is a collection of points that show different combinations maximum volumes production of several (usually two) goods or services that can be created under conditions of full employment and the use of all resources available in the economy.

The production possibilities curve reflects at each point the maximum volume of production of two products with different combinations of them, which allow the full use of resources. Moving from one alternative to another, the economy switches its resources from one product to another.