Define Marginal Opportunity Cost. Explain the concept with a hypothetical numerical example.

Marginal opportunity cost (MRT) examines the trade-off between the allocation of resources between the production of goods. It is the rate at which one good must be sacrificed to produce an extra unit of another good. The society has to decide how to allocate its scarce resources to the production of different goods and services. This is depicted by Production Possibility Frontier (PPF).

PPF depicts the various combinations of two commodities that the economy can produce using the full and efficient utilisation of the given resources and the given state of technology. The slope of PPF is an opportunity cost. It determines the shape of the PPC. The rate of sacrifice to produce more of the other good increases as one moves down the PPC. Thus PPC exhibits increasing opportunity cost. This increasing opportunity cost makes PPC concave to the point of origin.

Opportunity cost= Sacrifice/Gain =change in Y/change in X

This increasing opportunity cost can be explained with the help of a numerical example. It can also be used to derive the shape of the PPC.

When the economy is producing only one commodity (guns), it is producing 200 units of guns and no butter. When it decides to produce 10 units of butter, the output of food falls by 10 units and the opportunity cost is 1. When the production of butter increase by 20, 60 and finally 70 units, the opportunity cost rises by 1.5, 2 and 5 respectively. This increasing opportunity cost makes PPC concave.