OPPORTUNITY COST AND THE
PRODUCTION POSSIBILITY
CURVE
OPPORTUNITY COST
Daniel Jnr Sorogo
LESSON OBJECTIVES
• By the end of this lesson, the learner will be able to
• Explain Opportunity Cost
• Explain the influence of Opportunity Cost on decision-making
• Explain the Production Possibility Curve
• Explain factors that will shift the PPC.
OPPORTUNITY COST
Daniel Jnr Sorogo
Opportunity Cost
Opportunity cost is the cost of any choice measured in
terms of the next best alternative foregone (sacrificed).
Opportunity cost also explains the potential benefits
an individual, firm, and government misses out on
when choosing one alternative over the other.
OPPORTUNITY COST Daniel Jnr Sorogo
WHAT IS OPPORTUNITY
COST?
•
Opportunity cost is a fundamental concept that refers to the
value of the next best alternative forgone (given up) when a
choice is made.
• It represents the benefits that could have been gained from
choosing an alternative course of action but were given up in
favour of the chosen option.
• In other words, it's the cost of not choosing the next best
alternative.
OPPORTUNITY COST
Daniel Jnr Sorogo
EXAMPLE OF
OPPORTUNITY COST (1)
•
Suppose you have £10,000 to invest, and you're considering
two options: investing in stocks or putting the money into a
savings account with a fixed interest rate.
• If you choose the savings account, your opportunity cost would
be the potential returns you could have earned from the stock
market if you had chosen to invest in stocks.
• Opportunity Cost: The potential capital gains or dividends that
you miss out on by not investing in stocks.
OPPORTUNITY COST
Daniel Jnr Sorogo
INFLUENCE OF OPPORTUNITY COST ON DECISION-MAKING
❖Opportunity cost directly influences the decisions made by consumers,
workers, producers, and governments.
❖Consumers have limited incomes, so whenever they purchase a particular
good or service, they give up the benefits of purchasing another product.
❖Workers tend to specialize— for example, as secondary school teachers,
accountants, doctors, and lawyers. By choosing to specialize in a particular
profession, workers give up the opportunity to pursue other jobs and careers.
❖Producers need to choose between competing business opportunities. For
example, Toyota has to decide how best to allocate its research and
development expenditure in terms of developing its petrol-fuelled cars or its
hybrid electric cars.
OPPORTUNITY COST
Daniel Jnr Sorogo
INFLUENCE OF OPPORTUNITY COST ON DECISION-MAKING • A
government is always significantly affected by opportunity cost in
various aspects of its decision-making processes.
• Governments have limited resources, and they must decide
how to allocate those resources among various public services
such as healthcare, education, and social welfare.
• Each spending decision carries an opportunity cost, as the
resources used for one programme could have been used for
another. Governments must weigh the benefits and drawbacks
of each allocation to maximise overall societal well-being.
OPPORTUNITY COST
Daniel Jnr Sorogo
Assume a price of £3 per cup Assume a price of 15p per cup
Opportunity cost of spending £3 on a Starbucks expresso might be giving
up 20 cups of instant coffee
Assume a price of £3 per cup Assume a price of 15p per cup
Assume a price of 15p per cup Assume a price of £3 per cup Assume a price of 50p per cup
Assume a price of 15p per cup Assume a price of £3 per cup Assume a price of 50p per cup
The opportunity cost of buying a Starbucks expresso might be measured by another
alternative – namely giving up 6 cups of Nespresso pods.
Assume a price of 15p per cup Assume a price of £3 per cup Assume a price of 50p per cup
The opportunity cost of buying a Starbucks expresso might be measured by another
alternative – namely giving up 6 cups of Nespresso pods.
Many consumers regard Nespresso pods as expensive especially if the frame of reference is
Nescafe instant.
Assume a price of 15p per cup Assume a price of £3 per cup Assume a price of 50p per cup
The opportunity cost of buying a Starbucks expresso might be measured by another
alternative – namely giving up 6 cups of Nespresso pods.
Many consumers regard Nespresso pods as expensive especially if the frame of reference is
Nescafe instant. But if the frame of reference is Starbucks, they look good value!
CALCULATION OF
OPPORTUNITY COST?
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OPPORTUNITY COST
Daniel Jnr Sorogo
Production Possibility Frontier.
• Shows the maximum output of two types of products that can be
produced with a given amount of resources and technology.
• A production point on the curve represents full use of resources.
• Any point inside the curve – indicates unemployed resources i.e.
resources are not being utilised efficiently.
• Any point outside the curve – is currently unattainable.
• A shift to the right of a PPC is caused by an increase in the quantity or
quality of resources.
• A change in the slope of a PPC will occur if the ability to produce only
one of the two products alters.
• A straight line PPC indicates a constant opportunity cost. • Useful to
demonstrate economic growth and opportunity cost.15
Production Possibility
Frontier.
Capital Goods
Ym
A
Yo
Y1 B
Goods
X1
Xm
16
Consum
er
Xo
Production Possibility Frontier
• Assume a country can produce two types of goods with its
resources – capital goods and consumer goods
• If it devotes all resources to capital goods it could produce a
maximum of Ym.
• If it devotes all its resources to consumer goods it could produce a
maximum of Xm.
• If it reallocates its resources (moving round the PPF from A to B) it
can produce more consumer goods but only at the expense of
fewer capital goods.
• The opportunity cost of producing an extra Xo – X1 consumer
goods is Yo – Y1 capital goods.
• If the country is at point A on the PPF it can produce the
combination of Yo capital goods and Xo consumer
17
PPC and Economic Growth.
Capital
Goods
C
Y1
Consumer
Goods
Yo
.
B
A
Xo
X1
18
PPC and Economic Growth
• Production inside the PPF – e.g. point B
means the country is not using all its
resources
• It can only produce at points outside the PPF
if it finds a way of expanding its resources or
improves the productivity of those resources
it already has. This will push the PPF further
outwards – economic growth
19
Effect of
Technology Capital goods
technology
results in the
production of
more consumer
goods with the
available
resources.
0 Xo X1 Consumer goods
20
Improvement in
END OF LESSON
• THANK YOU
Daniel Jnr Sorogo
OPPORTUNITY COST