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Opportunity Cost of Time Explained

The chapter discusses opportunity costs and scarcity. It defines opportunity cost as the cost of not selecting the next best alternative. Examples are given such as the opportunity cost of using a building worth $100,000 for one year if the interest rate is 10% is the forgone interest. The opportunity cost of attending college includes tuition costs and foregone income from not working. Marginal analysis is introduced to determine the optimal level of an activity where marginal benefits equal marginal costs. A production possibilities curve is used to show scarcity and opportunity costs between two goods given limited resources.

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MIRZA TALHA ALI TAUQEER
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12 views25 pages

Opportunity Cost of Time Explained

The chapter discusses opportunity costs and scarcity. It defines opportunity cost as the cost of not selecting the next best alternative. Examples are given such as the opportunity cost of using a building worth $100,000 for one year if the interest rate is 10% is the forgone interest. The opportunity cost of attending college includes tuition costs and foregone income from not working. Marginal analysis is introduced to determine the optimal level of an activity where marginal benefits equal marginal costs. A production possibilities curve is used to show scarcity and opportunity costs between two goods given limited resources.

Uploaded by

MIRZA TALHA ALI TAUQEER
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd

Chapter 2: Opportunity costs

Scarcity
 Economics is the study of how
individuals and economies deal
with the fundamental problem of
scarcity.
 As a result of scarcity, individuals
and societies must make choices
among competing alternatives.
Opportunity Cost
 The opportunity cost of any alternative is
defined as the cost of not selecting the "next-
best" alternative.
 Example: Suppose that you own a building
that is worth $100,000 today and is expected
to be worth $100,000 one year from today. If
the interest rate is 10%, what is the
opportunity cost of using this building for one
year?
Example II
 The opportunity cost of college
attendance includes:
 the cost of tuition, books, and supplies,
 foregone income (this is usually the largest
cost associated with college attendance),
and
 psychic costs.
Example III:
 Opportunity cost of attending a movie:
 opportunity cost of tickets
 opportunity cost of time
Marginal analysis
 Marginal benefit = additional benefit
resulting from a one-unit increase in the
level of an activity
 Marginal cost = additional cost
associated with one-unit increase in the
level of an activity
Net benefit
 Individuals are not expected to
maximize benefit; nor are they
expected to minimize costs.
 Individuals are assumed to attempt to
maximize the level of net benefit (total
benefit minus total cost) from any
activity in which they are engaged.
Marginal analysis
 MB > MC  expand the activity
 MB < MC  contract the activity
 optimal level of activity: MB = MC
(Net benefit is maximized at this point)
Marginal benefit
 MB generally declines as the level of an
activity rises, ceteris paribus.
 Consider the MB of time spent studying:
Marginal cost
 For most activities, marginal cost rises
as the level of the activity increases.
Optimal study time
 The optimal amount of study time
occurs at the point at which MB = MC
Production possibilities curve
 Assumptions:
 A fixed quantity and quality of available
resources
 A fixed level of technology
 Efficient production (i.e., no
unemployment and no underemployment)
Example: study time
 4 hours left to study for two exams:
economics and calculus
 Output = grades on each exam
 Fixed resources?
 Fixed technology?
 No unemployed nor underemployed
resources?
Alternative uses of time
Law of diminishing returns
 Law of diminishing returns: output will
ultimately increase by progressively
smaller amounts when the use of a
variable input increases while other
inputs are held constant.
 Does this apply in this example? What
are the fixed inputs?
Production possibilities curve
Marginal opportunity cost
 Marginal opportunity cost = the amount
of another good that must be given up
to produce one more unit of a good.
Calculating marginal
opportunity cost
 In the interval
between points A
and B, the marginal
opportunity cost of
1 point on the
economics exam is
1/3 of a point on
the calculus exam.
Marginal Opportunity Cost
(continued)
 In the interval
between points B
and C, the marginal
opportunity cost of
one point on the
economics exam
equals 4/3 of a point
on the calculus
exam.
Law of increasing cost
 Law of increasing cost – marginal opportunity cost rises as the
level of an activity increases
Reasons for law of increasing cost
 Law of diminishing returns
 Specialized resources (heterogeneous
labor, land, capital, etc.)
Specialized resources in farming
 Some land, labor, and capital is better suited for wheat
production and some is better suited for corn production
Unemployed or underemployed
resources
Points outside of the PPC
Economic growth

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