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Economics

Opportunity Cost and the Production Possibility Frontier

An Overview of the Opportunity Cost

In this post, we will learn about opportunity cost and the production possibility frontier in Prelim Economics. In economics, the opportunity cost refers to the benefits that an individual, business or government misses out on when choosing one alternative to another. For example, if you choose to study for the next hour, your opportunity cost will be you giving up doing any other activity in that hour. We can visually express the opportunity cost of an action by using the production possibility frontier.

 

Why do we use the Opportunity Cost?

The opportunity cost is a great way for economists to express the basic relationship between scarcity and choice. In order to efficiently allocate resources in the best possible way throughout the whole economy, we must look at the opportunity cost of each decision.

 

What is the Production Possibility Frontier?

The production possibility frontier (PPF) is a curve that illustrates the varying amounts of two products that can be produced when both depend on the same finite resources. For example, let’s have a look at two goods – cars and laptops. Both cars and laptops depend on finite resources, and thus, we can use the PPF curve to illustrate how much of each we can produce.

Watch the video below to further your understanding of both the opportunity cost and production possibility frontier, and the relationship that they share.