Welcome to our AP Economics lesson on opportunity cost. Opportunity cost is a fundamental concept in economics that represents what you give up when making a choice. It's the value of the next best alternative that you forgo. For example, if you choose to study instead of going to a party, the opportunity cost is the enjoyment you would have had at the party. This concept is crucial for understanding economic decision-making, scarcity, and trade-offs.
Let's understand how to calculate opportunity cost using the Production Possibilities Frontier, or PPF. The PPF shows the maximum combinations of two goods an economy can produce with its available resources. Moving from point A to point B on the PPF means increasing production of Good A from 2 to 6 units. However, this comes at a cost - we must reduce production of Good B from 8 to 4 units. Therefore, the opportunity cost of producing 4 more units of Good A is 4 units of Good B. In other words, for each additional unit of Good A, we give up 1 unit of Good B. This trade-off is the essence of opportunity cost.
Let's look at our first example. You have one hour of free time and two options: watch a TV show or read an economics textbook. If you choose to watch TV, what's the opportunity cost? The opportunity cost is what you give up - in this case, the benefit you would have received from reading the textbook. This could include better understanding of economics concepts, potentially higher grades, or improved knowledge. Remember, opportunity cost isn't about all possible alternatives, but specifically the next best alternative that you didn't choose.
Let's move to our second example. A small island economy can produce either 100 coconuts or 20 fish per day using all its resources efficiently. First, what is the opportunity cost of producing 1 fish? To get 20 fish, they must give up 100 coconuts. So, 1 fish costs 100 coconuts divided by 20 fish, which equals 5 coconuts. The opportunity cost of 1 fish is 5 coconuts. For the second question, what is the opportunity cost of producing 1 coconut? To get 100 coconuts, they give up 20 fish. So, 1 coconut costs 20 fish divided by 100 coconuts, which equals 0.2 fish. The opportunity cost of 1 coconut is 0.2 fish. Notice that these opportunity costs are reciprocals of each other, which is a common pattern in two-good models.
Let's tackle our final, more complex example. You have 8 hours on Saturday with three options: work part-time earning $15 per hour for a total of $120, attend a concert that costs $50 but provides enjoyment worth $150, or study for your AP Economics exam with an estimated value of $100 from an improved score. To find the opportunity cost of attending the concert, we first calculate the net value of each option. Working gives you $120. The concert provides $150 of enjoyment minus the $50 ticket cost, for a net value of $100. Studying has a value of $100. If you choose to attend the concert, your next best alternative would be working, which would give you $120. Therefore, the opportunity cost of attending the concert is $120 - the value of the next best alternative you gave up. Notice that the $50 ticket price is an explicit cost, while the opportunity cost is an implicit cost of the forgone alternative.