Opportunity cost and comparative advantage

Week 1

Opportunity Cost Definition

The next alternative foregone.

Opportunity Cost Graph: Leisure/Study

Why is opportunity cost important?

We have limited resources so scarcity is an issue. We have to determine the optimal use of distribution of these resources.

What is a production possibility frontier?

It shows the maximum combination of factors that can be produced.

What information is this graph showing? A—>B, C, D

A to B: Increase in services (21-27). The opportunity cost is that the output of goods fall from 22 to 18.

D: Economy is inefficient. We can increase goods and services without opportunity cost.

C: Is impossible.

What is comparative advantage in Opportunity Cost?

It states that countries should specialise in producing goods where they have a lower opportunity cost.

What is a free good?

If there is no opportunity cost in consuming a good, then its a free good. e.g. breathing air.