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
- 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?
- 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
- 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
- Capital goods
- They are used to produce goods in the future
- Lead to increased consumption in the future
- Examples: Tractors, computers
- Consumption goods
- Goods meant for current consumption
- Examples: Milk, potato chips