Opportunity cost is a fundamental concept in microeconomics.

Opportunity cost is the result of the need t

make choices in a world characterized by relatively scarce resources. Because of relative scarcity, any
alternative chosen requires the sacrifice of other alternatives. This sacrifice is called opportunity cost. I
economics, this concept is the key to understanding costs. Opportunity costs and marginal costs (MC) ar
same concepts.

Opportunity costs are the costs associated with a choice or action. These costs can be expressed in real, physical te
(alternatives and the quantities of other goods sacrificed) or in monetary terms (the monetary value, or prices, of t
other goods sacrificed).

The amount of other goods that must be sacrificed as a result of a choice, is a function of the shape of the PPF. Th
is a discription of the rate at which one good can be "transformed" into another given constraints. The slope of the
called the "marginal rate of transformation (MRT)."

The monetary amount of opportunity cost or MC is determined by the shape of the PPF and price of the other good.
 © R Larry Reynolds 1999

cost is the result of the need to

use of relative scarcity, any
ice is called opportunity cost. In
sts and marginal costs (MC) are the

an be expressed in real, physical terms

the monetary value, or prices, of the

nction of the shape of the PPF. The PPF

ven constraints. The slope of the PPF is

e PPF and price of the other good.

 Chart Title
50

40

30

20

10

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27

-10

-20

-30

-40

-50
Col umn A Col umn B Col umn C Col umn D
Col umn E
 A Simple Production Possibilities Model
The case of Increase X
technically efficient Decrease X
50
alternatives.
At Xo = 0 then Yo = 44 45
44
43
New level 40
of X1 = 1 then Y1 = 43
35
The opportunity cost of X = 1

Yawls
"Law of Increasing Relative Cost" 30
The opportunity cost of the
additional unit of Xebecs 25
(X1) is the difference in the
Production 20
level of Yawls produced (Yo
Possibilities -Y1)
Xebecs Yawls 15
0 44 Yo = 44
1 43 Y1 = 43 10
2 40 Opportunity cost of 5
3 35 the last unit of X = 1
4 28 0
Xebecs
0

6
1
5 19
6 8
7 -5
8 -20
9 -37
1 43 0 0
1 43 0 44 43
0 0 0 44
 © R Larry Reynolds 1999

Xebecs
3

8
 A Simple Production Possibilities Model

Change output 50
49
48

At Xo = 0 then Yo = 49 45

New level Given the relative 40

of X1 = 1 then Y1 = 48 prices of X andY,
the marginal cost 35
The opportunity cost of X = 1
of the last unit of

Yawls
Price of Xebecs Px = $2.90 X 30
Price of Yawls Py = $4.80 is $4.80
25

Value of 20
Value of Value of
Output of Output of
total
Xebecs X Yawls Y output 15
0 $0.00 49 $235.20 $235.20
1 $2.90 48 $230.40 10
$233.30
2 $5.80 45 $216.00 $221.80
5
3 $8.70 40 $192.00 $200.70
4 $11.60 33 $158.40 $170.00 0

1
0

5
5 $14.50 24 $115.20 $129.70 Xebecs

6 $17.40 13 $62.40 $79.80

7 $20.30 0 $0.00 $20.30
8 $23.20 -15 29 $235.20
9 $26.10 -32 48
1 48 0 0
1 48 0 49 48
0 0 0 49
 © R Larry Reynolds 1999 © R Larry Reynolds 1999

50
9
8
45

40

35

30

25

20

15

10

0
1
0

Xebecs
Relationship of the PPF and These
control 48.00
MC Function buttons 44.00
PPF MC of X will shift 40.00
in Y the PPF
Xebecs Yawls 36.00

Yawls
and MC 32.00
0 45.42 28.00
1 45.41 0.00 24.00
20.00
2 45.40 0.01 16.00
3 45.37 0.03 X= 24 12.00
8.00
4 45.32 0.05 4.00
5 45.25 0.07 Y = 37.53 0.00

12

16

20

24

28

32
6 45.16 0.09 The MC of this level Xebecs
of output is the Y
7 45.05 0.11 sacrificed 5.00
8 44.91 0.14 MC of unit 24 of 4.50

9 44.74 0.17 Xebecs = 0.86 4.00

3.50

Yawls
10 44.55 0.20
3.00
11 44.32 0.23
2.50
12 44.06 0.26 2.00
13 43.77 0.29 1.50
14 43.44 0.33 1.00

15 43.07 0.37 0.50

5840 2.4 0.44
0.00
16 42.66 0.41 6 44
0

12

16

20

24

28

32
17 42.20 0.45 24 37.53 24 Xebecs
18 41.70 0.50 24 37.53 24
19 41.15 0.55 0 0 0
20 40.55 0.60 © R Larry Reynolds 1999

21 39.89 0.66
22 39.18 0.72
23 38.39 0.78
24 37.53 0.86
25 36.60 0.94
26 35.57 1.03
27 34.45 1.12
28 33.21 1.24
29 31.84 1.37
30 30.32 1.52
31 28.62 1.70
32 26.69 1.93
33 24.45 2.23
34 21.81 2.64
35 18.53 3.28
36 14.05 4.48
37 4.87 9.18
38 0.00 10.00
39 0.00 10.00
40 0.00 10.00
 40
40
36
36

24
32
32

38.39
28
28
24
24

0.86
0.86
Xebecs
0
Xebecs
20 20
16 16
12 12