ECON 1000 Lecture Notes - Opportunity Cost

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Published on 31 Jan 2013
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Microeconomics (ECON 1000) DAY 2 September 11th
Production Possibilities Frontier / Curve / Function
- Production Possibility Curve = max. output combinations producible from a give set of resource
inputs and a given set of technology
o Production possibility curve demonstrates scarcity, choice and opportunity cost
- Look at the “Canada divided into 7 regions” example in LN
o Max output when you can only shift one (wheat or apples), then BC is max bc most is
gained and least is lost
BC, per apple, costs 1/5 wheat
Minimize opportunity cost (lose out the least thing you can)
Opportunity cost is the slope of the curve (rise ÷ run) (Qwheat ÷ Qapples)
Slope doesn’t have to be constant
o For AB/MN and ON/QC, it is constant
o Why is opportunity cost higher in SK for producing apples than
in ON? Because the resources are different (not homogenous,
interchangeable)
o Concave = increasing OC = resources are not identical (typical)
o Convex = you make less of both; you give up what you already
have AND you’re not getting enough back with your second
thing
Constant slope = resources are identical; you’re not losing anything
from doing anything else or changing anything
When all the resources are used and I’m moving from one to the other, the
slope is always (-); why? When you already have something (production
possibility curve implies you already have something going for you), you have to
start giving it up to gain something else elsewhere
To produce an outlier (outside the curve), increase in resources/capital or
technological advancement; (inside the curve), inefficient use of resources and
not enough technological advancement to maximize inputs
- Two costs to study when examining some economic activity
o Resource cost = how many resources do I have to put in to get a certain return?
In a good investment, resource cost < rate of return
o Opportunity cost = cost of best available option / alternative i.e. what am I losing if I
choose one over the other, or what is the value of the thing you’re giving up?
In a good investment, opportunity cost < rate of return
The secret of economics is that opportunity cost is the most natural way of
analyzing the worth and value in something over something else
Cost of something should be equal to the marginal value of what you’re getting
out of it
Minimize opportunity cost to maximize efficiency
- Are wars good for market economies?
o They produce jobs
Microeconomics (ECON 1000) DAY 2 September 11th
That’s only beneficial if there are unemployed people that you put to war; if the
country puts “useful” men and women to war, then the rest of society loses out
because what they were contributing to society, they aren’t anymore