Production possibilities frontier
Opportunity Cost Opportunity cost (and marginal cost) based on the PPF
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- Let’s say we we've been hanging out in scenario E for a bunch of days.
- On average we've been catching one rabbit, but gathering 280 berries.
- We were, I guess, in a berry mood, so this is scenario E right over here.
- But now all of a sudden we are in a mood for more proteins.
- So let me write down: we are in scenario E
- and we are in the mood for more protein.
- And so we want to think about what are the trade-offs.
- If we try to catch more rabbits
- So what I want to do, I want to say,
- if I want to catch one more rabbit,
- what am I going to have to give up.
- So if I catch one more rabbit,
- so I go from one rabbit, on average, to two rabbits a day,
- so I am going from scenario E to scenario D,
- what am I going to give up?
- So this is plus one over here.
- Well, I am going to give up forty berries
- and you can see visually right here.
- If I try to get one more rabbit,
- I can't go into this impossible, this unattainable part right over here.
- I have to stay on the production possibilities frontier,
- sometimes abbreviated as PPF
- or I guess the acronym for it, I should say, is PPF.
- But if I want one more rabbit,
- the production possibilities frontier drops off
- and I will have to give up forty fruits.
- So one more rabbit means that I have a cost.
- So I have to give up, on average, forty berries
- and the technical term for what I have just described is
- the opportunity cost of going after one more rabbit is giving up forty berries.
- So let me write this down.
- The opportunity cost of one more rabbit
- and this is particular to scenario E, as we will see,
- is going to change depending on what scenario we are in,
- at least for this example.
- So the opportunity cost of one more rabbit is 40 berries.
- Assuming we are in scenario E.
- One more rabbit, I have to give up 40 berries.
- And another term, when we talk about the opportunity cost,
- of going after, of producing, I guess we could say
- the opportunity cost of producing one more rabbit here.
- When we talk about the opportunity cost of producing one more unit
- is sometimes called the marginal cost.
- So this, right over here, you can also view as the marginal cost.
- In this context of this video our costs are in terms of
- the thing that I am giving up, the opportunity that I am giving up.
- In other scenarios, we will see sometimes
- the marginal cost be given in actual monetary units, like dollars of whatever else.
- what was the cost of producing that extra unit, that extra widget right over there
- let‘s make sure we understand opportunity cost
- so that's, when we are sitting in scenario E, the opportunity cost
- of one more rabbit
- but whats the opportunity cost, lets say we are tired of eating meat
- we are sitting in scenario E and we want to become vegetarians all together
- so we want to go to scenario F
- essentially not eat any rabbits and eat as much fruit as possible
- so another thing that you could ask in scenario E
- is the opportunity cost of
- and just to make the numbers easier
- I am going to say, opportunity cost of 20 more berries
- is, well I am going to give up a rabbit
- so over here what we are doing is, we are saying
- OK, I want to increase my berries by 20, but to do that I have to decrease my rabbits by one
- so the opportunity cost, assuming we are in scenario E
- the opportunity cost of 20 more berries is one rabbit
- now this, right over here, is not a marginal cost
- cause I am talking about the cost of 20 more units
- not just one
- if I want to write this as a marginal cost of one more berry
- then I could just say, well 20 berries is one rabbit
- you could say, you could essentially divide both sides by 20
- so one more berry
- and I will assume for those who want to get more technical, its somewhat linear right over here
- one more berry, if we divide both sides by 20
- is 1/20 of a rabbit
- so if I go for one extra berry, sitting in scenario E
- on average, I am going to get 1/20 less of a rabbit
- and when I phrase it this way, it is being phrased as a marginal cost
- now, for those who want to get a little technical
- this is a curve, right over here, so it might not be exactly this
- we can't just, well, I don't want to get too technical
- for the sake of this one right over here, this is a safe way to think about it
- the opportunity cost of 20 more berries is one rabbit
- but if we assume that it's somewhat linear right over here
- its not so curved, it's somewhat of a line between those two points
- then the opportunity cost of 1 berry is 1/20 of a rabbit
- or the marginal cost of an extra berry is 1/20 of a rabbit
- and we could do it at different points on this curve
- and I actually encourage you to do, based on the data that we have
- in this table that we constructed in the last video, and maybe this curve
- think about what the opportunity cost is in the different scenarios
- if you're in scenario B, and if you want an extra rabbit
- how much is that going to cost you in terms of berries
- or if you want more berries, what is that going to cost you in terms of rabbits?
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