Synopsis

Marginal Opportunity Cost is the rate at which the output of one good is sacrificed for every additional unit of another good. It refers to the “Slope of Production Possibility Curve”.

Introduction

To understand what is “Marginal Opportunity Cost”, first we need to know the meaning of “Opportunity Cost“.

It simply means that lost opportunity due to which we have incurred the loss.

Let’s start with an example. 

Suppose, Kanika has been offered a job by 2 mega IT giants – Infosys and Wipro. The package offered by both the companies are as under –

Infosys –  ₹10L 

Wipro – ₹12L.

As per you, which option Kanika must go for?

As a common person, you will advise her to go for Infosys as it is paying high. 

But what if Infosys was not there. Kanika would have definitely taken up the job offered by Wipro. 

So, here Kanika’s opportunity cost is the package she lost due to acceptance of the job offer of Infosys i.e. 10L package offered by Wipro. 

Opportunity Cost in Economics

In economics, “Opportunity Cost refers to the total loss of output when resources are shifted from the production of one good to the production of other good, the technique of production remaining constant.“ 

Let us take an example – 

Ramesh is a farmer and he has one hectare of land and all the resources required for production purposes. He now has the option to put this land to the production of any of these goods- 

Wheat – ₹ 10,000

Rice – ₹ 8,000

Barley – ₹ 7,000

As a rational producer, Ramesh will employ his resources on the production of wheat where the value of output is maximum. 

So, the opportunity cost of employing resources in wheat = loss of output in the next best alternative i.e. Production of rice.

In other words, “Opportunity cost is the value of a factor in its next best alternative use.”

Marginal Opportunity Cost / Marginal Rate of Transformation

MOC = Additional loss occurred due to the shift of some resources from the production of one good to the production of other using the given technology.

The formula for MOC-

MOC tends to rise because –

1. All resources are not equally efficient for the production of every good.
2. Shift of resources from the production of one good to the other results in disturbance of their specialized use.

This is one of the assumptions of Production Possibility Curve. That’s why MOC is termed as “Slope of Production Possibility Curve”.

Schedule with diagram

Conclusion

The marginal opportunity cost of a producer keeps on increasing as more and more resources are shifted from production of one good to the other.