Production possibilities frontier
Increasing Opportunity Cost Why the opportunity cost may increase as you pursue more rabbits
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- What I want to do in this video is think about
- how the opportunity cost can change
- as we move from scenario to scenario.
- This is going to be particular to this example,
- but it's a phenomenon that you will see in many economic scenarios.
- So let's say we are starting off in Scenario F.
- We are vegetarians. We are only getting berries.
- We are not spending any time going after rabbits.
- But now we are starting to, I guess, crave protein.
- And we say well, what is going to be the opportunity cost
- if I go for that extra rabbit.
- If I go for that extra rabbit,
- then what's going to happen.
- Well I'm going to have to stay on my production possibilities frontier,
- and so I'm going to move to Scenario E,
- so if I go after that one extra rabbit,
- I'm going to give up 20 berries.
- So my opportunity cost in Scenario F, sitting in Scenario F,
- of going after that one rabbit, is 20 berries.
- Now let's keep going. What happens if I'm in Scenario E?
- I'm already on average eating one rabbit or finding one rabbit a day.
- And I want to go to two rabbits a day.
- What am I going to give up?
- (Let me do that in the same color.)
- What will I give up?
- Well now I am going to give up 40 berries!
- 40 berries, this is interesting.
- Now let's say we're in Scenario D
- and we want even more rabbits.
- We're really starting to become carnivores now.
- What am I going to give up?
- Well I'm going to give up 60 berries.
- If I'm able to get 3 rabbits every day on average,
- then I'm only going to get 180 berries now, instead of 240.
- Let's just keep going.
- So if I want yet another rabbit every day,
- then I'm going to have to give up 80 berries.
- Then finally just to feel some sense of completion.
- If I become a complete carnivore,
- and if I want to get on average, 5 rabbits a day,
- I'm going to have to give up another 100 berries
- and go to not having any berries at all.
- And so you might see something interesting:
- the more squirrels, sorry not squirrels...
- (Although I guess they're similar.)
- The more rabbits that I'm going after...
- Every time I try to go after another incremental rabbit,
- I'm giving up more and more berries.
- My opportunity cost is increasing.
- So this phenomenon - it's not always the case -
- but it's the case in this example...increasing opportunity cost.
- As we increase the number of rabbits we're going after...
- And you could do it the other way...as we increase...
- especially if you did it on a unit basis.
- if you said every incremental berry,
- or every incremental hundred berries we're going after,
- (But the numbers aren't as easy right over here.)
- you'll actually see something going the other way.
- But the question, an interesting question is:
- Okay Sal, you set up the numbers like this earlier, two videos ago,
- but why would this make sense?
- Why is this idea of increasing opportunity cost
- showing up in a lot of different economic,
- and you could call this an economic model.
- We've simplified our economic reality,
- the choices that we have to make down to two variables:
- the number of rabbits we have to go after or the number of berries.
- But why does this show up in economic models?
- And just to be clear, it doesn't show up in all of them.
- But to think about our example as a hunter-gatherer,
- we started here in Scenario F.
- In Scenario F we've decided to not pursue any rabbits -
- even the slower, not so quick-witted rabbit
- who maybe likes to hang out with you, next to you.
- And it likes to play with your spears, or bow and arrow.
- You are not even going after that rabbit.
- Instead you are choosing to spend all of your time on the berries.
- And not only are you literally getting the low hanging fruit - the easy berries.
- You're getting the berries that are further up the bush,
- the berries that you have to get cut by thorns to get,
- the berries you have to climb trees to get.
- So you're getting even hard to get berries,
- and you're not going after even easy to get rabbits.
- Now all of a sudden, if you say,
- Well, you know, that rabbit who has been hanging out with me,
- he's been kind of asking for it.
- And so that was very easy to get.
- It didn't take much time on a given day
- to get those really easy rabbits who like to hang out with you.
- You're not giving up a lot in terms of berries.
- One, it didn't take you much time
- to get those literally slow and maybe less quick-witted rabbits.
- And you're giving up in that same amount of time the very hard to get berries.
- So you're only going to give up about 20 of them.
- Now if you want 2 rabbits a day,
- not only are you going to get the slowest of the rabbits,
- the ones who aren't afraid of humans,
- now you're going to have to go after the slightly faster rabbit
- who wants to die a little bit less, and who is maybe a little sharper.
- And now you're not giving up the berries
- that are way up in the tree and are protected by thorns,
- you're giving up berries that are closer down the tree,
- so this is going to take you a little more time to do than this right over here.
- And in that little bit more time,
- you're also giving up berries that were easier to get.
- This phenomenon is going to happen
- all the way until, you know, this scenario
- where you're trying to get 5 rabbits a day.
- You are literally going after the quickest and the smartest rabbits.
- But you insist on going after them,
- and in your pursuit of these quick, fast rabbits,
- you're even ignoring berries, you're literally stepping on berries,
- you're not eating the berries that are right next to you
- because you're so obsessed with eating rabbits.
- So hopefully that gives you a sense of
- why increasing opportunity cost does show up...
- and when you graphically show it in terms of a production possibilities frontier,
- it shows up in this bow shaped curve.
- And you can see it because as we go from this point to this point,
- you see as we increase one
- the slope - the negative slope - is increasing.
- So another way to think about it is, in Scenario F,
- the slope is roughly like this.
- And I encourage you to review the algebra playlist
- if the idea of slope is confusing to you.
- But at F, the slope is like that.
- (I'm drawing the slope of the tangent line right over here.)
- At E, it gets even steeper.
- You're giving up even more of the berries per unit - rabbit.
- Now at D your giving up even more,
- and then you're giving up even more.
- And so whenever you see a bow shaped curve like this,
- so a curve that literally looks like this.
- This shows that you have increasing opportunity cost:
- as you increase more and more units,
- you're going to have to give up more and more of the alternative.
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At 5:31, how is the moon large enough to block the sun? Isn't the sun way larger?
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