Overview
This lecture explains the concept of opportunity cost, illustrating its application to decisions involving time and assets with practical examples and introducing the Production Possibility Frontier.
Opportunity Cost Explained
- Opportunity cost is the value of the next best alternative forgone when making a decision.
- It applies to both time (how you spend your hours) and assets (how you use resources you own).
Examples of Opportunity Cost
- Choosing to play games instead of working means missing out on hourly wages you could have earned.
- Deciding between low-wage work now and studying for a chance at higher future earnings involves comparing current and potential future opportunity costs.
- Selecting a field of study with limited job prospects can result in high opportunity cost if higher-earning fields were available.
- Using a building you own for your own business means forgoing potential rental income from others.
Production Possibility Frontier (PPF)
- The PPF illustrates the trade-offs between two activities when both require the same limited resource (e.g., time).
- Moving along the PPF shows increasing opportunity cost; more of one activity requires giving up increasing amounts of the other.
- Points inside the PPF are possible but not optimal (not fully using resources).
- Points outside the PPF are currently impossible with existing resources and technology.
- Increasing productivity can shift the PPF outward, enabling more output.
Key Terms & Definitions
- Opportunity Cost — the loss of potential gain from other alternatives when one alternative is chosen.
- Production Possibility Frontier (PPF) — a curve showing the maximum feasible combinations of two activities with limited resources.
Action Items / Next Steps
- Consider opportunity costs in future academic, financial, or personal decisions.
- Review textbook chapters on opportunity cost and the Production Possibility Frontier.
- Prepare for problems or case studies involving opportunity cost calculations.