After you have worked through this section of the learning unit, you should be able to:
- use a production possibilities table and the production possibilities curve to explain and illustrate opportunity cost
Production possibilities curve and opportunity cost
The opportunity cost of a resource is the value of the best alternative use that is given up or sacrificed. In the case of Zanadu, where two products are produced, the opportunity cost of the use of resources is measured in terms of the production of laptops and mobile phones.
In the following table, the opportunity cost of increasing the production of laptops by increments of 1000 is indicated in the fourth column:
Opportunity cost for Zanadu
| Combination | Laptops | Phones | Opportunity cost of increasing production of laptops by increments of a 1000 |
|---|---|---|---|
| A | 5 000 | 0 | 10 000 |
| B | 4 000 | 10 000 | 8 000 |
| C | 3 000 | 18 000 | 6 000 |
| D | 2 000 | 24 000 | 4 000 |
| E | 1 000 | 28 000 | 2 000 |
| F | 0 | 30 000 | – |
Drag the marker between the points to see the opportunity cost when production of either laptops or mobile phones is increased.
If one compares combinations B and C, the difference between these two combinations is that at point B, more laptops are produced – the number increases from 3 000 to 4 000 – while fewer mobile phones are produced - the number decreases from 18 000 to 10 000. This indicates that more resources are allocated to the production of laptops and fewer to the production of mobile phones.
At combination C:
At combination B:
What is the opportunity cost of increasing the production of laptops from 3 000 to 4 000 in terms of mobile phones?
The opportunity cost of increasing the production of laptops by a 1 000 (from 3 000 to 4 000) is the decrease in the production of mobile phones, which in this case is equal to 18 000 - 10 000 = 8 000 mobile phones. To increase the production of laptops, fewer mobile phones are produced, and the opportunity cost of producing more laptops is the mobile phones that are given up or sacrificed.
Graphically, the above is represented as a movement along the production possibilities curve from point C to point B. The opportunity cost of increasing the production of laptops by a 1 000 (from 3 000 to 4 000) is the decrease in production of mobile phones by 8 000 (from 18 000 to 10 000).
Drag the marker between the points to see the opportunity cost when production of laptops is increased.
Looking at the table, what is the opportunity cost of increasing the number of laptops from 1 000 to 2 000?
Increasing the level of production of laptops from 1 000 to 2 000 decreases the production of mobile phones from 28 000 to 24 000. The opportunity cost of the increases in mobile phones is therefore 28 000 – 24 000 = 4 000 mobile phones.
Opportunity cost for Zanadu
| Combination | Laptops | Phones | Opportunity cost of increasing production of laptops by increments of a 1000 |
|---|---|---|---|
| A | 5 000 | 0 | 10 000 |
| B | 4 000 | 10 000 | 8 000 |
| C | 3 000 | 18 000 | 6 000 |
| D | 2 000 | 24 000 | 4 000 |
| E | 1 000 | 28 000 | 2 000 |
| F | 0 | 30 000 | – |
Use the following diagram to indicate the opportunity cost of increasing the production of laptops from 1 000 to 2 000?
Graphically this is represented as follows:
Watch the following video about opportunity cost.
Activity
Do the following activity about opportunity cost and the production possibilities curve:
Are the following statements about the situation in Paradiso true or false?
The trade-off the people of Paradiso face is that in order to produce more guns, they must give up food.
The statement is indeed true.
The trade-off is indeed that in order to produce more guns, they must give up food and to produce more food, they must give up guns.
Think again. The statement is true.
The trade-off is indeed that in order to produce more guns, they must give up food and to produce more food, they must give up guns.
The trade-off the people of Paradiso face is that to produce more food, they must give up guns.
The statement is indeed true.
The trade-off is indeed that in order to produce more food, they must give up guns and to produce more guns, they must give up food.
Think again. The statement is true.
The trade-off is indeed that in order to produce more food, they must give up guns and to produce more guns, they must give up food.
The opportunity cost of producing guns is food.
The statement is indeed true.
The trade-off they face is that to produce more guns, they must give up food and to produce more food, they must give up guns. The opportunity cost of producing guns is therefore the food that is sacrificed.
Think again. The statement is true.
The trade-off they face is that to produce more guns, they must give up food and to produce more food, they must give up guns. The opportunity cost of producing guns is therefore the food that is sacrificed.
The opportunity cost of producing food is guns.
The statement is indeed true.
The trade-off they face is that to produce more guns, they must give up food and to produce more food, they must give up guns. The opportunity cost of producing food is therefore the guns that are sacrificed.
Think again. The statement is true.
The trade-off they face is that to produce more guns, they must give up food and to produce more food, they must give up guns. The opportunity cost of producing food is therefore the guns that are sacrificed.
Use the information in the following table to calculate the opportunity cost in terms of tons of food when increasing the production of guns by increments of one million:
Production possibilities table for Paradiso
| Combination | Food (tons) | Guns (millions) | Opportunity cost of increasing production of guns by increments of one million |
|---|---|---|---|
| A | 1 000 | 0 | |
| B | 900 | 1 | |
| C | 750 | 2 | |
| D | 550 | 3 | |
| E | 300 | 4 | |
| F | 0 | 5 |
| Combination | Food (tons) | Guns (millions) | Opportunity cost of increasing production of guns by increments of one million |
|---|---|---|---|
| A | 1 000 | 0 | - |
| B | 900 | 1 | 100 |
| C | 750 | 2 | 150 |
| D | 550 | 3 | 200 |
| E | 300 | 4 | 250 |
| F | 0 | 5 | 300 |