05 OPPORTUNITY COST

# 05 OPPORTUNITY COST - At any point on the PPF, to get one...

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SECTION 5: OPPORTUNITY COST

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OPPORTUNITY COST The best alternative that we give up when we make a choice
Suppose we are on the PPF I.e., we are producing efficiently To produce more of one item, we must give up some of the other item

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Suppose we are inside the PPF We can increase production of either or both of the items by becoming more efficient

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MEASURING OPPORTUNITY COST Put good Y on the vertical axis Put good X on the horizontal axis The opportunity cost of 1 additional unit of X equals the slope of the PPF
CONSTANT OPPORTUNITY COST The PPF is a straight line and has a constant slope The slope is negative To get more of one item, we always give up a constant amount of the other item

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EXAMPLE OF CONSTANT OPPORTUNITY COST Suppose a country can produce lumber (variable Y) or food (variable X) With specialization, assume the country could produce 500 units of lumber or 400 units of food. Assume the opportunity cost is constant. The slope of the PPF is (–500/400) = -1.25

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Unformatted text preview: At any point on the PPF, to get one more unit of food, we must give up 1.25 units of lumber INCREASING OPPORTUNITY COST Eventually, the cost of an additional unit of X is greater than the cost of the previous unit of X EXAMPLE OF INCREASING OPPORTUNITY COSTS: Suppose a country produces lumber (variable Y) and/or food (variable X). Suppose the country specializes in all lumber. To produce 1 unit of food reduces the production of lumber by very little. Just produce the unit of food on the most fertile ground. Eventually, to produce more food requires that we use less fertile land and need to we clear large amounts of forest to grow more food INCREASING OPPORTUNITY COST The slope of the PPF is not constant The slope becomes steeper (more negative) as X increases MORAL OF THE STORY: Eventually, to produce more of an item, an increasing amount of resources not well suited to producing that item will have to be used...
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## This note was uploaded on 04/07/2008 for the course ECON 0110 taught by Professor Kenkel during the Spring '08 term at Pittsburgh.

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05 OPPORTUNITY COST - At any point on the PPF, to get one...

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