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Opportunity Cost
written by Presillyn Tan ✈
Opportunity Cost
Human wants are
unlimited but the factors of production are limited. This leads to the problem
of scarcity. Thus, a society must make a wise decision and choose what goods
and services to produce. When the choice on what goods to produce is made, an
opportunity cost is incurred. Opportunity cost of undertaking an activity is
the benefit forgone by undertaking that activity. The benefit forgone is the
benefit that one might have gained from choosing the next best alternative. In
short, when society decided on what goods and services to produce, it’s also
scarifying the production of other goods and services.
Figure 1: Production
Possibility Curve and Opportunity Cost
Figure 1 presents the relationship
between production possibility curve (PPC) and opportunity cost. PPC shows the
maximum combination of outputs or final products that can be produced from a
given number of inputs. Assume that Apple Inc. produce two type of products,
iPhone and iPod. If Apple allocates all of the resources to produce iPhone
(point a), then none of the iPod is produced. So, the opportunity cost to
produce iPhone is to sacrifice the iPod’s production. Likewise, if Apple
decided to produce iPod only (point b), the opportunity cost in this scenario is
to give up the production lines that make iPhone. In point c, if Apple decided
to produces both products in equal proportion, then the company must allocates
part of the resources to produce iPhone and part of the resources to produce iPod.
Overall, PPC slopes downward from left to right. The downward slope represents
the concept of opportunity cost - you get more of one benefit only if you get
less of another benefit.
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