Opportunity Cost

Quick revise

When making these decisions it is important for firms to assess the opportunity cost of their decisions. Opportunity cost is the cost of the next best alternative

Scarcity and Choice - Decisions

In reality decisions regarding the economic problem are likely to be taken with regard to both economic and non economic considerations

Production Possibility Frontiers

These show the potential combinations of goods and services that an economy is able to produce with a certain amount of resources

If an economy is operating at a point that is inside the curve it is inefficient

It is not possible for an economy to operate at a point outside the curve

To operate outside the curve the curve needs to be shifted – this can be done through having more resources or using resources more efficiently.

 

production frontiers

This is an example of a production possibility frontier with two products – food and computers

Points Q,R, T and V all represent different choices on the PPF

The trade off or opportunity cost of point Q is one computer.

This video explains what is opportunity cost, shows examples and some thoughts on linear and concave PPFs

 

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