How to Calculate Opportunity Costs
Economics, March 2021
In my opinion, calculating opportunity costs is definitely the trickiest concept we've learned so
far, so here are some tips that will hopefully help you with the assignment.
When calculating opportunity cost, you are trying to put one good in the same terms as the
other so you can compare them. You can do this by dividing the good you are giving up by
the good you are choosing. Pick just one of the two products and calculate the opportunity
costs.
For example, let's say Joe can make 20 cookies and 5 cakes in one hour. Sally can make 15
cookies and 3 cakes in one hour. If you are trying to determine the opportunity cost of making
cakes you would do the following:
Joe: 5 cakes/hour = 20 cookies/hour --> divide each side by 5 (the good you are choosing) -->
1 cake/hour = 4 cookies per hour. This is your opportunity cost for Joe to specialize in making
cakes.
Sally: 3 cakes/hour = 15 cookies/hour --> divide each side by 3 (the good you are choosing) -->
1 cake/hour = 5 cookies/hour.
Now, we compare both Joe and Sally's opportunity costs if they were to make cakes:
For each cake Joe makes in one hour, he would be giving up 4 cookies.
For each cake Sally makes in one hour, she would be giving up 5 cookies.
Because 5 > 4, Sally would lose more than Joe if she specialized in cakes. Therefore, Joe has
the comparative advantage in making cakes, and Sally should specialize in making cookies.
Your Week 4 async assignment basically asks you to do the same thing but with chocolate and
wool. Then, it goes on to ask for the new amounts of each after they specialize. So once you
know which country should be producing each good, assume they use all of their resources to
make that specific product. The original numbers you are given represent each country using
half of its resources on each, so how would you calculate if each used all of its resources on
one product?
If you need any additional information, this is a great video: https://youtu.be/ciju8hN3ius