1 2.5. Calculating Opportunity Cost Using PPC AP Macroeconomics Notes

Factors like time, job satisfaction, or environmental impact may need to be considered. The PPF demonstrates whether resources are being used efficiently and fully when everything else remains constant. Thus, the variables can be changed to see how the curve reacts, letting you observe different outcomes.

+ 2.5 apples = – 2 bananas   (

• Economists use the PPC to compare opportunity costs between countries by analyzing their comparative advantage in producing specific goods.
• An economy may be able to produce all of the goods and services it needs to function using the PPF as a guide.
• (If four workers can make 1,000 shoes, then 40 workers will make 10,000 shoes).
• Reducing risk by holding safer assets such as Treasury securities or stable, dividend-paying stocks can mean giving up the potential for greater upside.

When illustrating the Law of Increasing Opportunity Costs, the PPC is typically bowed-outward (concave to the origin). This curvature reflects the increasing opportunity costs as production shifts away from one good to another. The slopes of the production possibilities curves for each plant differ. The steeper the curve, the greater the opportunity cost of an additional snowboard.

Constant vs. Increasing Opportunity Cost

Here, we wanted to know how many apples the country would have to forego to have half the bananas it had before. Expressions (6) and (8) are equivalent (just like expressions (1) and (3) were; actually, they all are). Opportunity cost is expressed in relative price, that is, the price of one choice relative to the price of another. No one even Outsource Invoicing considered the extraction of heavy crude when light crude was cheap. In the late 1990s, oil cost just $12 per barrel, and deposits of heavy crude such as those in Canada attracted little attention.

Non-Monetary Factors

• Suppose society has chosen to operate at point B, and it is considering producing more education.
• This is especially useful when analyzing decisions at the margin, a key principle in microeconomics.
• Scarcity always forces an economy to forgo some choice in favor of another.
• This guide will walk you through the concept of opportunity cost, its calculation, and its practical applications, empowering you to make more informed decisions in various aspects of business and life.
• The Production Possibilities Curve (PPC) illustrates the potential combinations of two goods or services an economy can produce with limited resources.
• Plant 3’s comparative advantage in snowboard production makes a crucial point about the nature of comparative advantage.

Many factors in decision-making are subjective or difficult to quantify. Use opportunity cost analysis as a guide, but also trust your intuition and consider factors that may not fit neatly into a calculation. The best alternative (highest return) among the other options is the stock market investment.

In the context of the Production Possibilities Curve (PPC), opportunity cost refers specifically to the quantity of one good or service that must be sacrificed to produce more of another. This trade-off can be observed directly on the PPC, where producing more https://uwais.kathrada.itvarsitystudent.org/deposit-vs-retainer-which-is-better-for-your/ of one good results in less of the other due to the economy’s limited resources and technology. Opportunity cost is defined as the value of the next best alternative foregone when a decision is made.

• However, any choice inside the production possibilities frontier is productively inefficient and wasteful because it is possible to produce more of one good, the other good, or some combination of both goods.
• Your investment didn’t lose money, but in retrospect you can see that there was an opportunity cost of $2,000 for not buying the other stock instead.
• According to the United States Department of Transportation, more than 800 million passengers took plane trips in the United States in 2012.
• For instance, producing five units of wine and five units of cotton (point B) is just as attainable as producing three units of wine and seven units of cotton.
• Before you make a choice in pretty much any aspect of your financial life, take a moment to consider what you’re giving up by not selecting another path.

To calculate comparative advantage, find the opportunity cost of producing one barrel of oil in both countries. The country with the lowest opportunity cost has the comparative advantage. This example shows that both parties can benefit from specializing in their comparative advantages and trading. By using the opportunity costs in this example, it is possible to identify the range of possible trades that would benefit each country.

Comparative Advantage and the Production Possibilities Curve

In reality this is possible only if the contribution of additional workers to output did not change as the scale of production changed. The linear production possibilities frontier is a less realistic model, but a straight line simplifies calculations. It also illustrates economic themes like absolute and comparative advantage just as clearly. We have seen the the opportunity cost of one good is law of increasing opportunity cost at work traveling from point A toward point D on the production possibilities curve in Figure 4 – The Combined Production Possibilities Curve for Alpine Sports. Suppose it begins at point D, producing 300 snowboards per month and no skis. The opportunity cost of the first 200 pairs of skis is just 100 snowboards at Plant 1, a movement from point D to point C, or 0.5 snowboards per pair of skis.