Opportunity Costs Opportunity costs - Economics is the study of ...
Week 1: Opportunity Costs
Opportunity costs
- Economics is the study of choices consumers, businesses, managers and governments make to attain -
their goals, given their scarce resources. These choices stem from scarcity (society's unlimited wants cannot be satisfied by our scarce resources) These choices involve and result in opportunity costs (or trade-offs)
- Opportunity cost applies to both production (what to produce) and consumption (what to consume) o It is the highest valued alternative that must be given up to engage in an activity with the firm’s or individual’s resources o It is basically the next best alternative to the use of resources that the firm is currently using on a particular activity o For example If a firm uses a building it owns (a resource) to carry out business activities so it doesn’t have to pay rent, it has zero explicit costs, but it also has an opportunity cost (implicit costs). The opportunity cost is the next best alternative to the use of resources (building) engaged in the activity. That is, the firm could rent the building and earn income and hence the real cost (monetary cost + opportunity cost) of using the building and paying no rent is the rent they could be receiving. Production Possibility Frontier (PPF)
- The production possibility frontier or curve shows the maximum attainable combinations of two products that may be produced with available resources by an economy
- Its downward slope reflects OC as producing one good means less of the other - For example, if an economy only produced computers and movies, their PPF:
Increasing marginal opportunity cost - The PPF is generally not a straight line, suggesting that there is an increasing opportunity cost of producing greater quantities of a good.
- This stems from the expectation that resources aren’t equally suitable to the production of different -
goods As shown below, the marginal opportunity cost of an additional movie is greater than the previous quantity
- The opportunity cost can be calculated: 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑔𝑖𝑣𝑒𝑛 𝑢𝑝 o Opportunity cost of the good gained = 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑔𝑎𝑖𝑛𝑒𝑑 o It is always positive Economic Growth
- Economic growth occurs when there is an increase in the production of goods and services in an economy over time This is reflected in PPF which is pushed outwards
- This allows greater attainable combinations of both goods - Key factors: 1. Technological change boosts productivity more goods and services produced 2. Increase in labour supply (e.g. immigration) increases competition in labour market, reducing wages, which in turn boost production 3. Capital accumulation increase in the economy’s stock of capital goods e.g. growth of resources such as factories, infrastructure etc 4. More natural resources discovered cheaper factors of production due to increased supply more G&S produced 5. Natural disasters these shift the PPF inwards
- Note: investment allows for greater economic growth in the future relative to an economy with less investment and more consumption (ceteris perisbus)
Opportunity costs
- Economics is the study of choices consumers, businesses, managers and governments make to attain -
their goals, given their scarce resources. These choices stem from scarcity (society's unlimited wants cannot be satisfied by our scarce resources) These choices involve and result in opportunity costs (or trade-offs)
- Opportunity cost applies to both production (what to produce) and consumption (what to consume) o It is the highest valued alternative that must be given up to engage in an activity with the firm’s or individual’s resources o It is basically the next best alternative to the use of resources that the firm is currently using on a particular activity o For example If a firm uses a building it owns (a resource) to carry out business activities so it doesn’t have to pay rent, it has zero explicit costs, but it also has an opportunity cost (implicit costs). The opportunity cost is the next best alternative to the use of resources (building) engaged in the activity. That is, the firm could rent the building and earn income and hence the real cost (monetary cost + opportunity cost) of using the building and paying no rent is the rent they could be receiving. Production Possibility Frontier (PPF)
- The production possibility frontier or curve shows the maximum attainable combinations of two products that may be produced with available resources by an economy
- Its downward slope reflects OC as producing one good means less of the other - For example, if an economy only produced computers and movies, their PPF:
Increasing marginal opportunity cost - The PPF is generally not a straight line, suggesting that there is an increasing opportunity cost of producing greater quantities of a good.
- This stems from the expectation that resources aren’t equally suitable to the production of different -
goods As shown below, the marginal opportunity cost of an additional movie is greater than the previous quantity
- The opportunity cost can be calculated: 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑔𝑖𝑣𝑒𝑛 𝑢𝑝 o Opportunity cost of the good gained = 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑓 𝑔𝑜𝑜𝑑 𝑔𝑎𝑖𝑛𝑒𝑑 o It is always positive Economic Growth
- Economic growth occurs when there is an increase in the production of goods and services in an economy over time This is reflected in PPF which is pushed outwards
- This allows greater attainable combinations of both goods - Key factors: 1. Technological change boosts productivity more goods and services produced 2. Increase in labour supply (e.g. immigration) increases competition in labour market, reducing wages, which in turn boost production 3. Capital accumulation increase in the economy’s stock of capital goods e.g. growth of resources such as factories, infrastructure etc 4. More natural resources discovered cheaper factors of production due to increased supply more G&S produced 5. Natural disasters these shift the PPF inwards
- Note: investment allows for greater economic growth in the future relative to an economy with less investment and more consumption (ceteris perisbus)
