Advantages Of Opportunity Cost

Opp Cost & Comp Advantage
Principles of Economics Assignments

Economist usually describes opportunity cost as the cost of an alternative that must be forgone in order to pursue a certain action, in other words, the loss of potential gain from other alternatives when one alternative is chosen. The opportunity cost is usually associated with the comparative advantage, which describes the opportunity cost faced by two producers. We will apply our knowledge of opportunity cost to identify the comparative advantage enjoyed by the Sri Lanka and the Kenya and then show that those two countries can benefit by consuming more of both goods after the trade.

Knowing that at their efficient capacity, Sri Lanka can produce either 1000 bags of rice or 3000 bags of tea and Kenya either 1000 bags of rice or 1000 bags of tea. In the situation of no trade between those

Countries, in general, choose to produce a surplus of the product in which they specialize and trade it for a different surplus good of another country. It is only based on that that traders decide on whether they should export or import goods depending on comparative advantages. In this case of Sri Lanka and Kenya their opportunity cost is presented as follow: for 1000 bag of rice, 3000 bags of tea are produce therefore we can assume that the opportunity cost of 1 bag of tea is 1/3 bags of rice in Sri Lanka while in Kenya the opportunity cost is 1 bag of tea for 1 bag of rice. Based on that we can assert that Both counties can decide to trade with each other based on their specialization because Kenya’s opportunity cost is less than Sri Lanka’s opportunity cost of rice, therefore, Kenya has a comparative advantage in the production of rice while Sri Lanka has a comparative advantage in the production of