chapter 2: scarcity + choice Flashcards
opportunity cost
the highest values, next best thing/ alternative that must be sacrificed to obtain something or satisfy a want
opportunity cost example:
consider the cost of traveling from Tucson to San Diego by plane or bus.
Suppose the bus costs $100 + takes 16 hours round trip + the plane costs $20 + takes 6 hours round trip
Suppose you value your time at $8 an hour (opportunity cost of an hour traveling is worth $8)
should you take the bus or plane?
take bus since we find out it is cheaper
opportunity cost example:
suppose you don’t know the value of a person’s time (call this c). What is the pay per hour that makes plane + bus travel equally attractive?
bus cost: $100 + 16 hours x C^$/hr= 100+16c
plane cost: $200 + 6 hours x C^$/hour= 200+6c
bus cost=plane cost –> 100+16c=200+6c
10c=100
c=10
opportunity cost example:
suppose there is a Taylor Swift concert you really want to go to.
The value you place on going is $150. The price of a ticket is $99. Alternatively you can go to a Justin Bieber concert for free.
What is the opportunity cost of attending the Bieber concert?
$0, 51, 99, or 150?
total value we get from the Taylor Swift concert is $150- $99= $51
the production possibilities frontier (PPF/ PPC for curve)
shows the maximum amount of any two products that can be produced by a society for a fixed amount of resources
the production possibilities frontier example
consider a restaurant that can make 2 goods: hamburgers + pizza
PPC
is never going to be linear. this is because of the law of increasing relative cost: the opportunity cost of producing a good rises as a society produces more of it
comparative advantage
doing an activity at a lower opportunity cost than someone else
comparative advantage note:
lower opportunity cost means that a person producing a different good is costly
specialization + trade
we rely on comparative advantage, specialization + trade
ex: tshirts, smartphones
