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To illustrate the concept of choice, we should first understand opportunity cost. This is defined as the next best alternative given up when making a choice. To demonstrate this concept, we will use a production possibility curve.
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5 stepsUnderstand Opportunity Cost.
Opportunity Cost is defined as the value of the next best alternative that must be given up when making a choice. In the context of a Production Possibility Curve (PPC), it's the amount of one good that must be sacrificed to produce an additional unit of another good.
Calculate the opportunity cost of producing more Butter when moving from point A to B.
At point A, the economy produces 15 Guns and 0 Butter. At point B, it produces 14 Guns and 5 Butter.
To produce an additional 5 units of Butter (from 0 to 5), the economy gives up Gun.
The opportunity cost of producing 5 units of Butter is 1 Gun.
The opportunity cost per unit of Butter is Guns per Butter.Calculate the opportunity cost of producing more Butter when moving from point B to C.
At point B, the economy produces 14 Guns and 5 Butter. At point C, it produces 10 Guns and 10 Butter.
To produce an additional 5 units of Butter (from 5 to 10), the economy gives up Guns.
The opportunity cost of producing 5 units of Butter is 4 Guns.
The opportunity cost per unit of Butter is Guns per Butter.Calculate the opportunity cost of producing more Butter when moving from point C to D.
At point C, the economy produces 10 Guns and 10 Butter. At point D, it produces 5 Guns and 14 Butter.
To produce an additional 4 units of Butter (from 10 to 14), the economy gives up Guns.
The opportunity cost of producing 4 units of Butter is 5 Guns.
The opportunity cost per unit of Butter is Guns per Butter.Calculate the opportunity cost of producing more Butter when moving from point D to E.
At point D, the economy produces 5 Guns and 14 Butter. At point E, it produces 0 Guns and 15 Butter.
To produce an additional 1 unit of Butter (from 14 to 15), the economy gives up Guns.
The opportunity cost of producing 1 unit of Butter is 5 Guns.
The opportunity cost per unit of Butter is Guns per Butter.The opportunity costs for increasing butter production are:
- From A to B: 1 Gun for 5 units of Butter (or 0.2 Guns per unit of Butter)
- From B to C: 4 Guns for 5 units of Butter (or 0.8 Guns per unit of Butter)
- From C to D: 5 Guns for 4 units of Butter (or 1.25 Guns per unit of Butter)
- From D to E: 5 Guns for 1 unit of Butter (or 5 Guns per unit of Butter)
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