What’s the cost of making a choice? Objectives Explain and give examples of the concept opportunity cost Key Concepts Opportunity cost

Opportunity Cost The next best alternative foregone when making a choice. (what we give up when we make a choice) 1.Describe an opportunity cost that you have experienced recently a)With money b)With time 2.What could be an opportunity cost of you deciding staying at school after your IGCSE?

Importance of Opportunity Cost The concept of opportunity cost is extremely important in economics and business. It represents the opportunities forgone. It is relevant to all stakeholders: – Individual – consumers – households – employees – firms – governments and the economy

Examples of Opportunity Cost A consumer decides to buy a new bicycle – They loose the opportunity to buy and benefit from some new clothes or an MP3 player A household decides to save $200 in a bank account towards a holiday next year - This means that they will be unable to spend that money on current consumption

The opportunity cost of the decision by an employee to give up work - will be his or her lost wages $10 billion to build new roads by a government - could have been used to build more schools instead The opportunity cost to an economy of a decision to use more resources to produce capital goods - is the current production of consumer goods that has to be given up

The Next Best Thing Imagine you have just bought the list of these items Now imagine you were unable to get any of them, what would be your second best choice? Make up two of your own What I have just bought What could I have bought instead i-pod Four-bedroom house Box of chocolates A ticket to the world cup final

How Do We Show Opportunity Cost? It is possible to show opportunity cost in a diagram called a Production Possibility Frontier (PPF) A PPF shows the maximum output that can be produced in an economy at any given moment, given the resources available. If an economy is fully utilising its resources then it will be producing on the PPF – the economy is efficient.

The Production Possibility Frontier (PPF) Objectives Understand the PPF Know how to use a PPF to show opportunity cost Key Concepts Production Possibility Frontiers (PPF)

Figure 2 The Production Possibilities Frontier Copyright©2003 Southwestern/Thomson Learning Production possibilities frontier A B C Quantity of Cars Produced 2, , ,000 3,000 1,000 Quantity of Computers Produced D

Labeling of a PPF is important Types of PPF labels: – Product A and Product B – Guns and Butter – Capital good and Consumer goods (present versus future decisions) – PPFs in microeconomics and macroeconomics (represents growth and development)

Shifting The PPF Outward An outward shift of the PPF may happen because: – More training of employees, enabling them to be more productive – Greater investment in capital goods such as machines and equipment – An increase in the population size – Improvements in technology providing better ways to do things

Present Vs. Future Decisions Economies that focus on capital goods are investing for the long term: they are investing in machines and equipment that will allow the economy to produce more in the future. This causes an outward shift in the PPF Economies that focus more on the here and now will produce more consumer goods