Lecture 3
OPPORTUNITY COST

1. Opportunity cost

• The foregone value of the next best alternative
  
  
• What is the opportunity cost of:
  • Attending the Eagles game on Sunday?
  • Attending college?
  • Sending a space mission to Mars?
    
    
• Opportunity costs and monetary costs
  • They may be about the same in markets that function well.
  • Opportunity costs include time, which is often omitted in monetary costs.

2. Resource allocation

1. The Production Possibilities Frontier (PPF)
   • It represents all possible combinations of output that can be produced in an economy, given its resources.
   • Why is the PPF negatively-sloped?

2. The principle of increasing costs
   • As you produce more of a good, it requires increasingly larger sacrifices in the production of other goods.
   • Specialization: Inputs tend to be specialized

3. Why is the PPF bowed outwards?
   • The shape of the curve reflects the principle of increasing costs.

3. Economic growth

• A country's output of goods and services increases from year to year
• The PPF shifts to the right continuously (Why?)

4. Capital goods and consumption goods

1. Capital goods
   • They are used to produce goods in the future
   • Lead to increased consumption in the future
   • Examples: Tractors, computers

2. Consumption goods
   • Goods meant for current consumption
   • Examples: Milk, potato chips