Opportunity Cost Assumptions All decisions involve a cost.

t. This cost is not simply counted in terms of money but also in term of resources.

Real cost Resources used in producing a good or service. Real Cost of Building a Bridge: Human Resources Workers Natural Resoruces Iron Capital Resources Machinery Opportunity Cost The value of time, money, goods, and services given up in making choice.

When people make choices between two possible uses of their resources , they are making a tradeoff.

Difference between Opportunity cost and Trade off Trade off A trade off is an exchange for one thing in return for another. Opportunity Cost The value of time, money, goods and services given up in making a choice. Examples: Lets say you are going out Saturday night. You have many choices of what you cannot do: Go out with your friends Stay at home and watch TV Go on a date Study for the evaluations

These are choices some are better than others. All these choices, except the one you choose are your choices of possible tradeoffs. You decided to go on a date. The trade off of going on a date is going out with your friends. One opportunity cost is the excitement and camaraderie you are missing going out with your friends. Another opportunity cost is the money you are going to spend on your date. Economic Model A simple plan that helps to analyze economic problems, seek solutions and make comparisons between the economic model and the real world. Its usefulness will depend on the assumptions of the world. Production Possibility Model A graph that shows the production choices open to a country.

Includes the tradeoffs a country must make to increase the production of a particular item. PPC example Assumptions: There are only two goods, pizza and spaghetti. There are limited inputs and given technology of production. Definition: The PPC shows the maximum amount of pizza you can produce, given the amount of spaghetti to be produced.

Points inside the PPC are inefficient. For any point inside there corresponds some point that represents more production of both goods.