why is the concept of opportunity cost important
Opportunity cost In microeconomic theory, the opportunity cost, also known as alternative cost, is the value (not a benefit) of the choice of a best alternative cost while making a decision. A choice needs to be made between several mutually exclusive alternatives; assuming the best choice is made, it is the "cost" incurred by not enjoying the benefit that would have been had by taking the second best available choice.[1] The New Oxford American Dictionary defines it as "the loss of potential gain from other alternatives when one alternative is chosen." Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice."[2] The notion of opportunity cost plays a crucial part in attempts to ensure that scarce resources are used efficiently.[3] Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered an opportunity cost.
Law of increasing costs In economics, the law of increasing costs is a principle that states that once all factors of production (land, labor, capital) are at maximum output and efficiency, producing more will cost more than average. As production increases, the opportunity cost does as well. The best way to look at this is to review an example of an economy that only produces two things - cars and oranges. If all the resources of the economy are put into producing only oranges, there will not be any factors of production available to produce cars. So the result is an output of X number of oranges but 0 cars. The reverse is also true - if all the factors of production are used for the production of cars, 0 oranges will be produced. In between these two extremes are situations where some oranges and some cars are produced. There are three assumptions that are made in this possibility. The economy is experiencing full employment (everyone who wants to work has a job), the best technology is being used and production efficiency is being maximized. So the question becomes, what is the cost of producing more oranges or cars? If the economy is at the maximum for all inputs, then the cost of each unit will be more expensive. The economy will have to incur more variable costs, such as overtime, to produce the unit.