Opportunity Cost

published on July 13, 2020

Let's say we've been hanging out in Scenario E for a bunch of days on average we've been catching one rabbit but gathering 280 berries we were going to guess in a in a berry mood so this is scenario e right over here but now all of a sudden we're in the mood for more

Proteins let me write down we are in scenario scenario E and we're in the mood for more protein and so we want to think about what are the trade-offs if we try to catch more rabbits so what I want to do I want to say if I want to

Catch one more rabbit one more one more rabbit what am I going to have to give up so if I catch one more rabbit so I go from one rabbit on average to two rabbits a day so I'm really going from scenario e to scenario D what am I going

To give up so this is plus one over here well I'm going to give up I'm going to give up 40 berries and you can see it visually right here if I try to get 1 more rabbit I can't go into this impossible this unattainable

Part right over here I have to stay on the production possibilities frontier sometimes sometimes abbreviated as P P as P P F or I guess the acronym for it I should say is p PF but if I want one more rabbit

Though the production possibilities frontier drops off and I will have to give up 40 fruit so 1 more rabbit means that I have a cost so I have to give up I have to give up on average 40 40 berries and the technical term for what

I've just described is the opportunity cost of going after one more rabbit is giving up 40 berries so let me write this down the opportunity cost opportunity cost of 1 more rabbit one more rabbit and this is particularly Oh

E as we'll see it's going to change depending on what scenario we are in at least for this example so the opportunity cost of 1 more rabbit is is 40 berries is 40 berries assuming we are in scenario e 1 more rabbit I have to

Give up 40 berries and another term when we talk about the opportunity cost of going after after producing I guess we could say the opportunity cost of producing one more rabbit here when we talk about the

Opportunity cost of producing one more unit that sometimes called the marginal cost so this right over here you can also view as the marginal cost marginal cost in the context of this video our costs are in terms of the thing that I'm

Giving up the opportunity that I'm giving up in in other scenarios you'll see sometimes the marginal cost be given in actual monetary units like dollars or whatever else what was the cost of producing that extra unit that extra

Widget right over there but let's make sure we understand opportunity cost so that's when we were sitting in Scenario e the opportunity cost of 1 more rabbit but what's the opportunity cost sitting in let's say where we we're tired of

Eating meat we're sitting in Scenario e and we want to become vegetarians all together so we want to go to scenario so we want to get we want to go to scenario F essentially not eat any rabbits and eat as much fruit as possible so another

Thing that you could ask in scenario E is the opportunity cost up or to know G cost opportunity cost of and just to make the numbers easier I'm going to say opportunity cost of 20 more berries 20 more berries 20 more berries is well I'm

Going to give up I'm going to give up a rabbit so over here what we're doing is we are we're saying okay I want to increase my berries by 20 but to do that I have to decrease my rabbits by 1 so the opportunity cost assuming we are in

Scenario e the opportunity cost of 20 more berries is 1 is 1 rabbit now this right over here is not a marginal cost because I'm talking about the cost of 20 more units not just 1 if I want to write this as a marginal cost of one more very

Then I could just say well if 20 berries is one rabbit you could say you could essentially divide both sides by 20 so one more berry one more one more berry and I'll assume for those of you who want to get technical that it's somewhat

Linear right over here one more berry if we divide both sides by 20 is one more berry is one 20th one 20th of a rabbit so if I go for one extra berry sitting in Scenario II on average on average I'm going to get one

Twentieth less of a berry and when I when I phrase it this way it is being phrased it is being phrased as a as a marginal as a marginal cost now for those of you who want to get a little technical this is a curve right over

Here so it might not be exactly this we can't just well I don't want to get too technical for the sake of this one right over here this is a safe way to think about it the opportunity cost of 20 more berries is Wanda rabbit but if you

Assume that this is somewhat linear right over here it's not so curved somewhat of a line between those two points then the opportunity cost of one berry is one twentieth of a rabbit or the marginal cost of an extra berry is

One twentieth of a rabbit and we could do it at different points in this curve and actually encourage you to do based on the data that we have in this table that we constructed in the last video and maybe this curve think about what

The opportunity cost is in the different scenarios if you're in scenario B and if you want an extra rabbit how much is that going to cost you in terms of in terms of in terms of berries or if you want more berries if you want more

Berries what's that going to cost you in terms of rabbits

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