ECON 1B03 Lecture Notes - Lecture 1: Opportunity Cost
21 May 2018
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PPF and Opportunity Costs
To move from 0 trucks to 500 trucks (A to B)
- To get 500 trucks, give up 2000 smart phones
- To get 1 truck (2000/500) = 4 smart phones
- The opportunity cost of a truck = 4 smart phones from A to B
To move from 500 trucks to 700 (B to C)
- To get 200 trucks give up 1000 smart phones (1000/200=5)
- The opportunity cost of a truck = 5 smart phones from B to C
To move from 700 trucks to 1100 (C to D)
- To get 400 trucks give up 5000 smart phones (5000/400)
- The opportunity cost of a truck = 12.5 smart phones from C to D
We can easily calculate the opportunity cost of a smart phone along the PPF
- If you know the opportunity cost of one good you get the OC of the other
- It is the inverse of the opportunity cost of a truck moving between the same points of the PPF
- The opportunity cost of a smart phone= 1/(opportunity cost of a truck)
- Ex. 6000 smart phones to 8000
o To get 2000 smart phones give up 500 trucks
o 500/2000= 0.25 trucks
o Growing from b to a = ¼
- Notice that as we move down the PPF the opportunity cost of a truck increases
o This explains why the PPF is bowed out- increasing opportunity costs
o In fact, the absolute value lslope of the PPFl is the opportunity cost of a truck at any
point along the PPF
o In general, for any 2 goods X and Y, the lslope of PPFl = opportunity cost of X
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ECON 1B03 Full Course Notes
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Document Summary
To move from 0 trucks to 500 trucks (a to b) To get 500 trucks, give up 2000 smart phones. To get 1 truck (2000/500) = 4 smart phones. The opportunity cost of a truck = 4 smart phones from a to b. To move from 500 trucks to 700 (b to c) To get 200 trucks give up 1000 smart phones (1000/200=5) The opportunity cost of a truck = 5 smart phones from b to c. To move from 700 trucks to 1100 (c to d) To get 400 trucks give up 5000 smart phones (5000/400) The opportunity cost of a truck = 12. 5 smart phones from c to d. We can easily calculate the opportunity cost of a smart phone along the ppf. If you know the opportunity cost of one good you get the oc of the other. It is the inverse of the opportunity cost of a truck moving between the same points of the ppf.
