1. Leaders in finance, accounting and business advice Business Systems Opportunity Cost

4. 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.

5. 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.

6. 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 .

8. 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

9. Static Model - The schedule can be shown graphically and is known as ‘A Production Possibility Frontier’ or ‘Production Possibility Curve’.

10. Production Possibility Frontier or Curve Consumer Goods Capital Goods 15 30 45 60 75 90 20 40 60 80 100

11. Production Possibility Frontier or Curve - The production possibility frontier or curve shows all the combinations of output an economy can produce.

12. 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.

13. 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

14. 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

15. 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

16. 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

17. Production Possibility Frontier or Curve Consumer Goods Capital Goods 100 75 60 40

18. Production Possibility Frontier or Curve - New technology or resources have been discovered increasing total possible production. - Economic Growth has taken place.

19. Production Possibility Frontier or Curve Consumer Goods Capital Goods 100 75 60 40

20. - The resource discovery or new technology is most suited to the production of capital goods. Production Possibility Frontier or Curve

21. - 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

22. Production Possibility Frontier or Curve Consumer Goods Capital Goods 100 75 60 40 W . Should an economy produce at point W?

23. - 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

24. Leaders in finance, accounting and business advice Business Systems We wish to thank our supporters: