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Opportunity Cost.Teacher

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    Opportunity Cost.Teacher Opportunity Cost.Teacher Presentation Transcript

    • Leaders in finance, accounting and business advice Business Systems Opportunity Cost
    • Opportunity Cost
      • - The primary concern of economics is the problem of relative scarcity - resources are scarce relative to wants and therefore choices must be made.
    • Opportunity Cost
      • - Production of one good means foregoing the production of another good.
      • - Similarly, consuming one good or service reduces our purchasing power and prevents us from consuming another good or service.
    • Opportunity Cost - We tend to think of the costs of a good or service in dollars, or monetary terms. - Opportunity cost is the term used to represent the true cost of an economic decision and can be defined as the value of the next best alternative foregone.
    • Opportunity Cost - For example, $ 20 spent on a CD could have been used to buy a T-shirt. The monetary cost is $ 20 but the opportunity cost is the T-shirt.
    • Opportunity Cost The concept of opportunity cost can be easily illustrated using a model called the production possibility frontier. - The model is a graph which shows all the combinations of goods and services that can be produced by an economy given the available resources and level of technology .
    • Static Model
      • - This model is called a ‘static model’ because it refers to one point in time.
      • It is assumed;
      • That an economy’s resources are fixed in both quantity and quality.
      • - Technology is fixed.
      • - The economy can only produce 2 types of goods.
    • Static Model For example - assuming the economy can produce consumer and capital goods, a production possibility schedule may look as follows: Consumer Goods 100 80 60 40 20 0 Capital Goods 0 15 30 45 60 75
    • Static Model - The schedule can be shown graphically and is known as ‘A Production Possibility Frontier’ or ‘Production Possibility Curve’.
    • Production Possibility Frontier or Curve Consumer Goods Capital Goods 15 30 45 60 75 90 20 40 60 80 100
    • Production Possibility Frontier or Curve - The production possibility frontier or curve shows all the combinations of output an economy can produce.
    • Production Possibility Frontier or Curve - The slope of the curve reflects the law of increasing opportunity cost - indicating that resources are not equally suited to different types of production.
    • Production Possibility Frontier or Curve Consumer Goods Capital Goods 100 75 The opportunity cost of producing 100 units of Consumer Goods is? 75 = Capital Goods
    • Production Possibility Frontier or Curve Consumer Goods Capital Goods 100 75 60 40 The opportunity cost of producing 60 units of Capital Goods is? 60 = Consumer Goods
    • Production Possibility Frontier or Curve Consumer Goods Point H represents either inefficient resource usage or unemployed resources. Capital Goods 100 75 60 40 H . Capital Goods
    • Production Possibility Frontier or Curve Consumer Goods Point J is unattainable because it lies outside the frontier, insufficient resources are available. Capital Goods 100 75 60 40 J . Capital Goods
    • Production Possibility Frontier or Curve Consumer Goods Capital Goods 100 75 60 40
    • Production Possibility Frontier or Curve - New technology or resources have been discovered increasing total possible production. - Economic Growth has taken place.
    • Production Possibility Frontier or Curve Consumer Goods Capital Goods 100 75 60 40
    • - The resource discovery or new technology is most suited to the production of capital goods. Production Possibility Frontier or Curve
    • - Is there a best place to be on the production possibility curve? - Any point on the production possibility curve is considered efficient as all resources are being fully utilized. Production Possibility Frontier or Curve
    • Production Possibility Frontier or Curve Consumer Goods Capital Goods 100 75 60 40 W . Should an economy produce at point W?
    • - Not necessarily if the economy required more consumer goods, then the economy should produce closer to the consumer goods axis. - If the economy requires more capital, then the economy would be better suited producing higher up the frontier towards the capital goods. Production Possibility Frontier or Curve
    • Leaders in finance, accounting and business advice Business Systems We wish to thank our supporters: