Opportunity Cost vs. Marginal Cost

Difference Between Opportunity Cost and Marginal Cost The concept of marginal price and opportunity cost is important in…

Difference Between Opportunity Cost and Marginal Cost

The concept of marginal price and opportunity cost is important in manufacturing and production industries. Although not directly related to each other, they play an important role in determining increase of production in the most profitable manner. This article will take a closer look at the two concepts and will point out differences between the two.

What is Opportunity cost?

The opportunity cost refers to the sacrifice of the highest value of a product that a company must make to produce another article. In other words, it refers to the prospect of gain which we must give up by taking alternative measures. From the perspective of investment is the difference that is there between the returns from the chosen mode of investment and the one that was ignored or missed. If you had an option of investing in a stock that produces 10% within a year, but chose another stock that produces only 6%, we say that your opportunity cost is the difference in these two i.e. 4%.

In real life, we often encounter many opportunities and choose the one that we think is best for us. In this way, we end up giving up other opportunities that all together form the opportunity cost. If an executive enrolls himself in a MBA program as a result of being dissatisfied with his current salary and with the expectation of better salary in the future after being a MBA, the opportunity cost is the sum total of his annual salary and the fees that he has to pay to the business school. Yet in real life situations, calculation of opportunity cost that one incurs while giving up other opportunities in order to choose one particular opportunity is not as simple as it appears.

What is the marginal cost?

The marginal price is a concept that is applicable in the production units and referred to the change in the total price if an extra piece that is being produced in a cycle of operation. So it is represented as the extra price charged to produce an additional unit.

Suppose in a small factory, 100 pieces are produced in one day and owner decides to produce a more unit, then he/she requires not only the additional commodity, but also has to pay overtime to the workers involved in the production work and this will weigh on his/her skillful mind before he decides to increase production. In case of a plant operating at the highest capacity, the marginal price is always high. However, since the raw material can be bought in bulk at cheaper prices, production of extra article results in a fall in the marginal cost.

The marginal cost varies widely from industry to industry and also from one product to another. Some economists prefer to call the marginal cost as the price of opportunity associated with producing an additional unit. If profits are higher than the cost incurred in producing one more unit, the owner may sell well in the production of this additional unit. If, however, the opportunity price is higher than the profits that are ultimately made, the factory owner chooses to let go of the idea of producing one more unit.





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