How much does lunch cost if its free?

Opportunity Cost The cost of an alternative that must be given up in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.

Examples The opportunity cost of going to college is the money you would have earned if you worked instead.  You lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages. If you expect that these four years invested in education will eventually make up for the lost wages, you make the decision to attend college.

Types of Cost Explicit Implicit Price of good or service Benefit received from goods or services Implicit Benefit of alternative activity Lost enjoyment Lost wages for staying home from work Money that could be saved buying a cheaper alternative good  enjoyment of that money

Production/Possibility Frontier The point at which an economy is most efficiently producing its goods and services and, therefore, allocating its resources in the best way possible. There are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can be produced.

Country X Beans (100 tons) Maximum production of any combination of goods Current production of 50 tons rice & 50 tons beans 50 tons 50 tons (100 tons) Rice

Opportunity cost of Rice and beans In this case the opportunity cost of producing one more unit of beans is sacrificing one unit of rice production. To increase rice production by one unit the country must sacrifice one unit of bean production.

What if… Country X had a spontaneous technological advance that allowed them to produce twice as much rice for the same price? For the same original cost, Country X can now produce twice as much rice, shifting their PPF outward. The opportunity cost of producing beans is now twice that of producing rice, they must give up two units of rice for every one unit increase in bean production Beans (100 tons) 50 tons 50 tons (100 tons) Rice 200 tons

Producing inside the PPF Producing at point X means that the country's resources are not being used efficiently or, more specifically, that the country is not producing enough beans or rice given the potential of its resources Overutilization Beans (100 tons) Y Point Y represents a production level that is currently unreachable to that economy given its current resource capabilities 50 tons X underutilization (100 tons) Rice 200 tons

This is important to the PPF because a country will decide how to best allocate its resources according to its opportunity cost.

Factors shifting PPF Negative shifts Positive shifts Economic contraction (economy slows down) Positive shifts Technological advances (this leads to cheaper production) Economic growth

Individual PPF Saving Money Immediate Consumption

Opportunity Cost of Saving For the individual, decisions are based on the explicit and implicit costs. The opportunity cost of spending all your money now is the interest rate that could be earned by saving. Opportunity cost of saving all your money is the consumption that you could have today.

Corporation Frontiers Capital Goods: Goods used in the production of other commodities Land Labor Production Equipment Consumer goods: Final goods and services marketed to consumers. Corporations face the trade-off between producing more consumer goods or re-investing in capital goods and sacrificing current revenue in order to shift their PPF outward in the future.