Opportunity Cost PDF

Opportunity Cost What is opportunity cost? You’ve seen that moving from one point to another on the PPF involves a trade off. But what are the terms of the tradeoff? How much of one item must be forgone to obtain an additional unit of another item—a large amount or a small amount? The answe...

Opportunity Cost What is opportunity cost? You’ve seen that moving from one point to another on the PPF involves a trade off. But what are the terms of the tradeoff? How much of one item must be forgone to obtain an additional unit of another item—a large amount or a small amount? The answer is given by opportunity cost The amount must be forgone to obtain an additional unit of another item is the opportunity cost. To calculate opportunity cost, we are going to use Production possibilities frontier PPF The Opportunity Cost of a Cell Phone The opportunity cost of a cell phone is the number of DVDs forgone to get an additional cell phone. It is calculated as the number of DVDs forgone divided by the number of cell phones gained. Opportunity Cost of good Y= No. good X / No. good Y Examples: Opportunity Cost and the Slope of the PPF The opportunity cost of a cell phone increases as the quantity of cell phones produced increases. The magnitude of the slope of the PPF measures the opportunity cost. Because the PPF is bowed outward, its slope changes and gets steeper as the quantity of cell phones produced increases. When a small quantity of cell phones is produced—between points A and B— the PPF has a gentle slope and the opportunity cost of a cell phone is low. A given increase in the quantity of cell phones costs a small decrease in the quantity of DVDs. When a large quantity of cell phones is produced—between points E and F—the PPF is steep and the opportunity cost of a cell phone is high. A given increase in the quantity of cell phones costs a large decrease in the quantity of DVDs. Opportunity Cost Is a Ratio The opportunity cost of a cell phone is the ratio of DVDs forgone to cell phones gained. Similarly, the opportunity cost of a DVD is the ratio of cell phones forgone to DVDs gained. So, the opportunity cost of a DVD is equal to the inverse of the opportunity cost of a cell phone. Example The Opportunity Cost of a Cell Phone  Assignment What is his opportunity cost of a pound of berries when Ali increases the quantity of berries from 21 pounds to 26 pounds and production is efficient? Does this opportunity cost increase as he produces more berries? Additional point to think in it