Lesson 3

Opportunity cost
 Review questions
• What is consumption?
• What do we mean by exchange?
• What is the difference between goods and
services?
• What is a durable good?
• Can you give me an example of a capital good?
• What is a merit good?
• Can you give me an example of a public good?
Opportunity
Cost
If I ask you, what will
you choose??
What is your choice?
Schools Or libraries

Roads Or Hospitals
• What you DO NOT CHOOSE is your
Opportunity Cost

• Opportunity Cost is the highest cost

forgone when making the decision
 Limited Resources: Choice
Individual Business Government

Opportunity Cost
Who has to face this problem
of Opportunity Cost?
• You and me (Individuals)

• Firms (Business)

• Government
Production Possibility Curve (PPC)

• Every decision/choice we make has

an Opportunity Cost

• This idea of Opportunity Cost can

be illustrated using a PPC
A Typical PPC ………….
Unattainable

Opportunity
cost of is
increasing…

Inefficient
• Production Possibility curve (PPC) shows the
maximum combinations of goods and
services that can be produced by an
economy in a given time period with its
limited resources

• A point outside the graph is unachievable

and a point inside the graph is inefficient
 PPC also tells you:

• What you can and cannot produce

• What is the cost of producing the

other good
 Depending on our choices of
Production,
the opportunity cost may

❖Remain Constant
❖Increase
❖Decrease
Opportunity cost.
Further examples.
Opportunity cost is the cost of choice

• It is the cost of the next best alternative given up, in order to

consume/produce a good or service.
• What would you buy with US$10? (next best alternative?)
• How should the government spend US$250 million?
(Or, should the government cut taxes by US$250 million?)
• What occupation will you choose when you finish your studies?
• How should a new business invest US$20 million?
• Should we conserve more natural resources?
 Production possibility curves
• Production possibility curves (PPCs) show the maximum combined output of
two or more products a firm or an entire economy can produce with its
available resources

• Because resources are limited, producing more of one product means

producing less of another

• PPCs are therefore a useful way of showing the opportunity cost of

producing more of one product in terms of how much of another must be
given up
 Production possibility curves
A firm producing cars and trucks
What is the opportunity cost of producing 20 more trucks?
Production possibility curves

An economy producing
consumer goods and
capital goods
What is the opportunity
cost of producing 15 more
tonnes of consumer
goods?