Still confused about Opportunity Cost?

Hello!

It seems that the concept of opportunity cost is a challenging concept to grasp but that’s okay! We were equally clueless initially as well!

We know that to incur an opportunity cost, the firm/economy has to be maximizing the use of all its resources or what we like to call it, be productively efficient. So when a firm/economy is known to be productively efficient, or producing efficiently, it means that it is on the PPF.

The confusion comes in when we need to identify the opportunity cost of producing a certain good.

So, let’s break this down into little bite size portions.

  1. A pen is sold for $2. The cost of purchasing a pen is $2.
  2. Alternatively, $2 can buy me a plate of chicken rice.The opportunity cost of purchasing a pen is one plate of chicken rice.
  3. I bought 50 pens. The cost of purchasing 50 pens is $100 (50 x $2).
  4. Alternatively, I could have bought 50 plates of chicken rice. The opportunity cost of purchasing 50 pens is 50 plates of chicken rice.
  5. Simplifying the italic phrase in point 4. The opportunity cost of producing 50 pens is 1 plate of chicken rice per pen.

Compare that with:

  1. 1 unit of x requires 1 unit of labor(l) to produce. The cost of producing 1x is 1l.
  2. Alternatively, 1 unit of labor(l) produces 2y. The opportunity cost of producing 1x is 2y.
  3. Economy A produces 50 units of X. The cost of producing 50x is 50l.
  4. Alternatively, economy A could have produced 100y. The opportunity cost of producing 50x is 100y.
  5. Simplifying the italic phrase in point 4. The opportunity cost of producing 50x is 2y per x.

That should be able to facilitate your understanding of opportunity cost. Remember, opportunity cost can be referred to either in terms of x per y or y per x, depending on what the question asks.

For example, what is the opportunity cost of producing x? The answer would be ??? y per x. What is the opportunity cost of producing y? The answer would be ??? x per y.

Hope that helps!

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