Marginal opportunity cost combines opportunity cost and marginal cost to measure the cost of producing extra units of goods. It can be applied to business decisions, such as increasing production, or personal decisions, such as buying multiple ice cream cones.
Marginal opportunity cost is an expression used to describe the amalgamation of two economic terms: opportunity cost and marginal cost. Opportunity cost refers to a system of measuring the cost of something in consideration of what must be given up in order to achieve it. Marginal cost is the extra cost associated with making the decision to produce extra units of a product. Thus, marginal opportunity cost is the measurement of the opportunity cost of producing extra units of goods.
This concept applies to the cost of business decisions where one item must be sacrificed for something else. For example, a company may produce 10,000 units of pens in eight hours a day. If company executives decide to scale up pen production to 12,000 pens per day, the cost can be calculated using the concept of marginal opportunity cost. In this case, it will include considerations of overtime that would be paid to workers or extra hours that need to be added to work shifts to accommodate the increase. It will also include a cost calculation for the extra materials needed to produce the pens.
In addition to business or economics, this measurement can also be applied to personal decisions. For example, a guy might have $50 United States Dollars (USD) in his pocket that should last for a week. Assuming the guy has a craving for ice cream and buys one for $5 USD, that would reduce the income he has to spend for the rest of the week to $45 USD. If he decides to buy another ice cream cone for $5 USD, that would further reduce his income to $40 USD. The opportunity cost for the first ice cream cone is $5 USD, while the marginal opportunity cost for the second ice cream cone is $5 USD.
Another way to further illustrate the concept using the example above is to imagine that the boy could comfortably afford the first $5 (USD) spent on ice cream, but had to sacrifice his bus fare for the second one. In this case, the cost for the second sundae is greater than for the first: the second sundae not only cost him $5 (USD) more, it also cost him his trip home, which he had to recoup to walk.
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