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## Opportunity cost and the Production Possibilities Curve

# Opportunity cost

AP.MACRO:

MOD‑1 (EU)

, MOD‑1.B (LO)

, MOD‑1.B.1 (EK)

, MOD‑1.B.2 (EK)

AP.MICRO: MKT‑1.C (LO)

, MKT‑1.C.1 (EK)

, MKT‑1.C.2 (EK)

## Video transcript

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?