Opportunity Cost Flashcards
What is opportunity cost?
Opportunity cost is a way of looking at a decision in terms of what you must give up.
Cost of the next best alternative forgone (given up) when a decision is made
- a rational person would choose the option that has the smallest opportunity cost
opportunity cost is an important element of economics because it helps us to understand how rational decisions are made. It also helps us to quantify what we lose out on by making a decision
Trade offs
A trade-off is the willingness of an economic agent to give up one thing for another
- for example, i am willing to trade my time for the money my employer pays me
- losing my time has an opportunity cost (the benefit i would have had from using this time for leisure) but the payment i get from my employer is enough to compensate me for this loss
Production possibility curve
A production possibility curve (PPC) is a way of showing the range of possibilities that exist for an economy or a firm.
Figure 3.1 shows a PPC for a firm that can choose to make a combination of Good A and Good B is shown on the vertical axis.
- the maximum combinations that the firms can make using all of its resources are represented by the PPC
- any points on the PPC (like points X and Y) are productively efficient. This means all of the resources are being used to produce the maximum possible output.
- any point within the PPC is possible but productively inefficient. This means that there may be unused resources (which is a waste) or they are being used but dont produce the maximum possible
- any point beyond the boundaries of the PPC is impossible
IMAGES
