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.
Compare that with:
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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