Overview
This lecture covers the concept of opportunity cost, providing definitions, real-life examples, and its representation through the Production Possibility Curve (PPC).
Opportunity Cost: Definition and Examples
- Opportunity cost is the value of the next best alternative forgone when making a choice.
- In microeconomics, it is the benefit lost by choosing one activity over another.
- If you choose product B over product A, product A is the opportunity cost.
- Example: Keeping money at home instead of a bank results in lost interest as opportunity cost.
- Choosing coffee over tea makes tea the opportunity cost.
- For consumers, buying a laptop instead of a mobile makes the mobile the opportunity cost.
- For governments, funding local schools instead of firm subsidies makes the subsidies the opportunity cost.
- For businesses, using labor to produce food instead of textiles makes textiles the opportunity cost.
- Everyday example: Watching a football match instead of cricket makes cricket the opportunity cost.
- Choosing sleep over studying sacrifices the knowledge gained, making it the opportunity cost.
Opportunity Cost in Production
- When choosing to produce more of one good (Good A), you must reduce production of another (Good B).
- The units of the forgone good represent the opportunity cost for each production decision.
- Example scenarios show decreasing Good B as production of Good A increases, illustrating rising opportunity costs.
Production Possibility Curve (PPC)
- The PPC shows all maximum combinations of two goods that an economy can produce with full and efficient resource use.
- Because resources are limited, producing more of one good means producing less of another.
- The PPC visually demonstrates the opportunity cost between two goods.
- A shift along the PPC curve shows increasing opportunity costs as production choices change.
Calculating Opportunity Cost on a PPC
- The opportunity cost of Good A on the PPC = (Change in Good B) ÷ (Change in Good A).
Key Terms & Definitions
- Opportunity Cost — The value of the next best alternative forgone when a choice is made.
- Production Possibility Curve (PPC) — A graph showing the maximum possible output combinations of two goods an economy can achieve using all resources efficiently.
Action Items / Next Steps
- Memorize the formula: Opportunity Cost = Change in Good B ÷ Change in Good A.
- Practice drawing and interpreting PPC diagrams.
- Prepare examples of opportunity cost for potential exam questions.