Theory question 103
Basic ConceptsSection B: answer three questions only from this section.
(a) Explain the term opportunity cost (b) Highlight the relevance of the opportunity cost concept to individuals, firms and government.
Show the model answer
(a) Opportunity cost is the alternative forgone (the next best alternative given up) when a choice is made
It arises because resources are scarce and wants are many; example: a student with N50 who buys a textbook instead of a meal has an opportunity cost of the meal
(b) Individuals: helps them draw a scale of preference and spend limited income to get maximum satisfaction
Firms: helps them choose what to produce, which inputs and methods (labour- or capital-intensive) to use, and where to invest
Government: helps it rank projects and choose how to spend limited revenue (e.g. schools versus roads) for maximum welfare
Define with an example, then apply the idea to each of the three groups.