Course: AP®︎/College Macroeconomics > Unit 1Lesson 2: Opportunity cost and the Production Possibilities Curve
- Production possibilities curve
- Opportunity cost
- Increasing opportunity cost
- PPCs for increasing, decreasing and constant opportunity cost
- Production Possibilities Curve as a model of a country's economy
- Lesson summary: Opportunity cost and the PPC
- Opportunity cost and the PPC
Opportunity cost is the trade-off that one makes when deciding between two options. The example of choosing between catching rabbits and gathering berries illustrates how opportunity cost works. The related concept of marginal cost is the cost of producing one extra unit of something. Created by Sal Khan.
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- Is he basically stating near the end that marginal cost is the same as opportunity cost? Or is there a difference between them?(11 votes)
- The Marginal Cost is generally different from the Opportunity Cost in concept. However the Marginal Cost gets equal to the Opportunity Cost only when you look for the cost of producing "only one" extra unit AND when that cost is expressed by the other goods (rabbits VS berries).(37 votes)
- Why are some of the scenarios impossible?(4 votes)
- They are beyond what you are physically capable of producing. If you can type 40 words per minute, it would be impossible for me to ask you to type 50 words per minute.
With practice, you might be able to get there eventually. That's "technological improvement."(31 votes)
- i don't really understand the difference between opportunity and marginal cost!(6 votes)
- Opportunity cost expresses the relationship between scarcity and choice, while marginal cost represents the cost of producing an additional unit.(18 votes)
- Why the opportunity cost to hunt one more rabbit is different on the curve?(5 votes)
- The first few rabbits are the easier rabbits to catch. When the hunter-gatherer tries to get more though, he can't keep going after only easy rabbits, but instead has to go after some harder rabbits.(7 votes)
- Why is the PPF a curve and not a line?(3 votes)
- It can be a straight line and it would mean that catching a rabbit will require the same amount of time/effort as gathering fixed amount of berries. For example, catching one rabbit is always the same time/effort as gathering 100 berries. So 5 rabbits = 500 berries.
But in real world, such rate most likely wouldn't be constant. Bowed out curve shows you that if you want more things on x-axis you will have progressively less things on y-axis. Each new thing in x-axis will result in increased opportunity cost then previous. For bowed in curve it's reverse, additional thing on x-axis will result in less opportunity cost for things on y-axis. On each additional unit of x-axis you will "sacrifice" less things on y-axis.(8 votes)
- why the opportunity cost of 1 more berry is 1/20 , we dont come across these situations in daily life ?(1 vote)
- We do come across these situations in everyday life, though not with berries (unless you hunt for a living). Imagine the real-life situation when you give up something for something else. Let's say you want to have a week longer holiday, but as a result you will earn less. In this case you give up some portion of your income (1/5 or 1/6... etc, or 1/20) for a longer holiday.(9 votes)
- what is demand?(2 votes)
- demand is the need for the supply by the general public. For instance, there is a high demand for heat (gas) in the winter time and a relatively low demand for A/C. When viewed in the market place, say when Apple releases a new iPhone, then there is a really high demand for the new product and there is a restricted amount on the supply. Due to the high demand and the low supply, Apple is allowed to ask for a very high price. A trend is able to be graphed as the demands and supplies change.(7 votes)
- what are normal goods?(3 votes)
- normal good means that there is a direct relationship btwn demand and income. As income inc so will demand from my understanding(4 votes)
- What's the difference between "opportunity cost" and "trade-off"?(1 vote)
- A trade-off denotes the option we give up, to obtain what we want. On the other hand, the opportunity cost is the cost of the second best alternative given up to make a choice.(1 vote)
- what is the difference between marginal cost and opportunity cost(3 votes)
- Marginal Cost is how much it would cost to produce one more unit (or, how much cost would be saved by producing one less). Opportunity Cost is the amount of money that could have been earned via the next-best alternative use of the resources(2 votes)
Let's say we've been hanging out in scenario E for a bunch of days. On average, we've been catching one rabbit, but gathering 280 berries. We were in, I guess, a berry mood. So this is scenario E right over here. But now all of a sudden, we're in the mood for more protein. So let me write down, we are in scenario E. And we're in the mood for more protein. And so we want to think about what are the trade-offs if we try to catch more rabbits? So what I want to do-- I want to say, if I want to catch 1 more rabbit, what am I going to have to give up? So if I catch one more rabbit-- so I go from 1 rabbit on average to 2 rabbits a day. So I'm really going from scenario E to scenario D. What am I going to give up? So this is plus 1 over here. Well, I'm going to give up 40 berries. And you can see it visually right here. If I try to get 1 more rabbit, I can't go into this impossible, this unattainable part right over here. I have to stay on the production possibilities frontier, sometimes abbreviated as PPF. Or I guess the acronym for it, I should say, is PPF. But if I want 1 more rabbit, the production possibilities frontier drops off, and I will have to give up 40 fruit. So 1 more rabbit means that I have a cost. So I have to give up, on average, 40 berries. And the technical term for what I've just described is the opportunity cost of going after 1 more rabbit is giving up 40 berries. So let me write this down. The opportunity cost of 1 more rabbit-- and this is particular to scenario E. As we'll see, it's going to change depending on what scenario we are in, at least for this example. So the opportunity cost of 1 more rabbit is 40 berries, assuming we are in scenario E. 1 more rabbit, I have to give up 40 berries. And another term when we talk about the opportunity cost of going after-- after producing I guess you could say-- the operating cost of producing 1 more rabbit here, when we talk about the opportunity cost of producing 1 more unit, that's sometimes called the marginal cost. So this right over here, you can also view it as the marginal cost. In the context of this video, our costs are in terms of the thing that I'm giving up, the opportunity that I'm giving up. In other scenarios, you'll see sometimes a marginal cost be given in actual monetary units, like dollars or whatever else. What was the cost of producing that extra unit, that extra widget, right over there. But let's make sure we understand opportunity cost. So that's when we were sitting in scenario E, the opportunity cost of 1 more rabbit. But what's the opportunity cost-- let's say, we're tired of eating meat. We're sitting in scenario E, and we want to become vegetarians altogether. So we want to go to scenario F-- essentially not eat any rabbits and eat as much fruit as possible. So another thing you could ask in scenario E is the opportunity cost of-- and just to make the numbers easier-- I'm going to say opportunity cost of 20 more berries is, well, I'm going to give up a rabbit. So over here, what we're doing is we're saying, OK, I want to increase my berries by 20, but to do that, I have to decrease my rabbits by 1. So the opportunity cost-- assuming we are in scenario E-- the opportunity cost of 20 more berries is 1 rabbit. Now this right over here is not a marginal cost, because I'm talking about the cost of 20 more units, not just 1. If I want to write this as a marginal cost of 1 more berry, then I could just say, well if 20 berries is 1 rabbit, you could essentially divide both sides by 20. So 1 more berry-- and I'll assume, for those of you who want to get technical, that it's somewhat linear right over here-- 1 more berry if we divide both sides by 20 is 1/20 of a rabbit. So if I go for one extra berry sitting in scenario E, on average I'm going to get 1/20 less of a berry. And when I phrase it this way, it is being phrased as a marginal cost. Now for those of you who want to get a little technical, this is a curve right over here. So it might not be exactly this. Well, I don't want to get too technical for the sake of this one right over here, this is a safe way to think about it. The opportunity cost of 20 more berries is 1 rabbit, but if you assume that this is somewhat linear right over here-- it's not so curved, it's somewhat of a line between those 2 points-- then the opportunity cost of 1 berry is 1/20 of a rabbit. Or the marginal cost of an extra berry is 1/20 of a rabbit. And we can do it at different points of this curve, and I actually encourage you to do. Based on the data that we have in this table that we constructed in the last video and maybe this curve, think about what the opportunity cost is in the different scenarios. If you're in scenario B and if you want an extra rabbit, how much is that going to cost you in terms of berries? Or if you want more berries, what's that going to cost you in terms of rabbits?