Econ 102 - Chapter 2: Scarcity and Choice

Opportunity cost

The highest-valued, next best alternative that must be sacrificed in order to attain something or satisfy a want.

Example of Opportunity cost

Bus: Costs $100 and takes 16 hours roundtrip

Plane: costs $200 and takes 6 hours roundtrip

Suppose you value your time at $8 an hour (i.e the opportunity cost of 1 hour travelling is $8). Should you take the bus or plane?

Cost of Bus: $100 + (16 hours x $8/hr)( Opportunity cost of time is part of economic cost) = $228

Cost of Plane: $200 + (6 hours x $8/hr) = $248

-----> You should take the Bus

Example of Opportunity cost:

Suppose you do not know the value of a person's time (Call this x). Can you find this x such that plane and bus travel are equally attractive?

$100 + (16x) = $200 + (6x)

10x = $100

x = $10/hr

Example of Opportunity cost:

Suppose there is a Taylor Swift concert and you really want to go to this concert. The value you place on going is $150. The price of a ticket is $99. Alternatively, there is a Justin Bieber concert you could attend for free. What is the Opportunity cost of attending the Bieber concert?

$51

Total Value of Taylor Swift Ticket: $150 - $99 = $51 (Net "happiness", not giving up money bcs the concert is free)

Example of Opportunity cost:

What is the Opportunity cost of attending class?

Sleep, attending another class, hanging out with friends, etc.

What does the Production Possibilities Frontier show?

What is it called when it is talking about a firm instead of a society?

The maximum amount of any two products that can be produced by a society from a fixed amount of resources if all resources are being used.

Production Possibility Curve (PPC).

See Notebook for examples.

The graph of PPC is generally what?

This represents what?

nonlinear

The law of increasing relative cost

Note: Linear PPC would represent constant opportunity cost.

What is the law of increasing relative cost?

The opportunity cost of producing a good rises if a society/firm produces more of it.

See TPS graph problems in notebook

Comparative Advantage

A person/society has a comparative advantage over another person/society if they can produce a good at a lower opportunity cost.

Note: Lower opportunity cost means that a person producing a different good is costly.

Having a comparative advantage in production means that a party should specialize and trade!

Example of Comparative Advantage:

How long do you think it would take for you to make your own chicken sandwich from scratch?

Source: How to make Everything on Youtube

Total Cost: 6 months of time and $1500

(The chicken sandwich companies have a comparative advantage)

Absolute Advantage

When a person/country/firm can produce at a lower cost.

See Comparative Advantage chart example in notebook