ch03eyeon lecture

# Point d to point e tradeoff point e to point d

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point D to point E = tradeoff point E to point D = tradeoff

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Two goods that concern you Your GPA Time you have for leisure / job To earn a higher GPA you must forgo leisure / income. Opportunity cost of higher GPA = the leisure/income forgone. Opportunity cost of more leisure/income = Lower GPA. Your Production Possibilities Frontier
Figure shows a student’s PPF . Any point on or inside the PPF is attainable. A student who studies efficiently achieves a point on the PPF . A student who studies inefficiently achieves a point inside the PPF . Your Production Possibilities Frontier ATTAINABLE & INEFFICIENT ATTAINABLE & INEFFICIENT UNATTAINABLE UNATTAINABLE ATTAINABLE & EFFICIENT ATTAINABLE & EFFICIENT

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How a student allocates 168 available hours The student allocates: 48 hours each week in class and studying 120 hours working, sleeping, or taking leisure The student’s GDP is 3 Your Production Possibilities Frontier
DEFINITION The Opportunity Cost The BEST thing you MUST give up to get something The Opportunity Cost of a Cell Phone Is the number of DVD’s forgone to get another cell phone Calculation: The decrease in the quantity of DVDs divided by The increase in the number of cell phones as we move along the PPF.

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Moving from A to B , 1 cell phone costs 1 DVD. 3.2 OPPORTUNITY COST
Moving from B to C , 1 cell phone costs 2 DVDs. 3.2 OPPORTUNITY COST

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Moving from C to D , 1 cell phone costs 3 DVDs. 3.2 OPPORTUNITY COST
Moving from D to E , 1 cell phone costs 4 DVDs. 3.2 OPPORTUNITY COST

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Moving from E to F , 1 cell phone costs 5 DVDs. 3.2 OPPORTUNITY COST
INCREASING OPPORTUNITY COST Increasing Opportunity Cost The opportunity cost of a cell phone increases as more cell phones are produced.

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INCREASING OPPORTUNITY COST Slope of the PPF and Opportunity Cost The magnitude of the slope of the PPF measures opportunity cost. The PPF is bowed outward , as more cell phones are produced, the PPF becomes steeper and the opportunity cost of a cell phone increases PPF bowed out…why? Resources are not equally productive If PPF were Linear = constant slope and constant opp. Cost
OPPORTUNITY COST Opportunity Cost Is a Ratio O.C. cell phone = # DVD lost # Cell phone gained O.C. DVD = # cell phones lost # DVDs gained When the opportunity cost of a cell phone is x DVDs, the opportunity cost of a DVD is 1/ x cell phones.

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