What is the opportunity cost of attending an 8 a.m. economics class?
To answer this question, think of all the other activities you could do at this exact time, and rank these choices (from most preferred to least preferred).
At 8 a.m., you could sleep a bit more, have a longer breakfast, take more time to walk to school, watch the early morning news, etc.
Since you made a choice to come to your 8 a.m. economics class, then the best alternative that you DID NOT choose is your opportunity cost. If you value sleep the most, then sleeping is your opportunity cost.
Note: Since you cannot do all of the other activities at the same time, it is incorrect to state that all of those activities are your opportunity cost of attending your 8 a.m. economics class.
The opportunity cost of attending class at 8 a.m., or of any activity differs across individuals. My opportunity cost of attending class at 8 a.m. may be eating breakfast, while for you, it may be taking a longer shower.
Opportunity Cost (of a choice): the value of the best alternative that was not chosen because something else was chosen.
Production Possibilities: alternative combinations of production of various goods that are possible, given the economy’s resources.
To simplify the concept of production possibility, let us think for a moment that the production of an economy can be divided into two broad categories. Suppose the economy can produce either computers (laptops, desktops, servers) or movies (thrillers, love stories, mysteries, musicals). The choice between computer and movies is symbolic of one of the most fundamental choices indiiduals in a society must face: how much to invest in order to produce more or better goods in the future versus how much to consume in the present. Computers can help produce more or better goods. Movies are a form of consumption. Other pairs of goods could also be used to illustrate this exaple. As you can see, with the scarcity of resource such as labor and capital, there is a choice between producing some goods, such as computers, versus other goods, such as movies. If an economy produces more of one, then it must produce less of the other. The below table gives us an example of alternative choices, or the production possibilities, for computers and movies.
Table 1 Production Possibilities.
Opportunity CostsIncreasing Opportunity Costs: a situation in which producing more of one good requires giving up an increasing amount of production of another good.
Why do opportunity costs increase?
Some of the available resources are more suited in producing one good than another. In our example above, some of the available resources are better suited for movie production than computer production,and vice versa. Workers who are good at computer building might not be good at acting, for example, or movie making may requie an area with a dry sunny climate. As more and more resources go into making movies, we are forced to take resources that are much better at computer making and use them for movie making. Thus more and more computer production must be lost to increase movie production by a given amount. Adding specialized computer designers to a movie cast would be very costly in term of lost computers, and it might add little to movie productions.
Figure 2: The Production Possiblity Curve
Each point on the curve shows the maximum number of computers than can be produced when a given amount of movies is produced. The points with letters are those in Table 1. and are connected by smooth lines. Points in the shaded are inside the curve are inefficient. Points outside the curve are impossible. For the efficient points onthe curve, the more movies that are produced, the computers are produced. The curve is bowed out because of increasing opportunit costs.
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