Opportunity Cost

Khan Academy2011-12-29

1M views|12 years ago

💫 Short Summary

The section discusses the opportunity cost and marginal cost of increasing rabbit production in scenario E, where catching one more rabbit would require giving up 40 berries. It also explores the opportunity cost of increasing berry production by sacrificing one rabbit, framing it as the cost of 20 more berries. The concept of marginal cost is further explained in the context of the video's focus on the trade-offs between catching rabbits and gathering berries.

✨ Highlights

📊 Transcript

✦

Moving from scenario E to scenario D by catching one more rabbit requires giving up 40 berries.

00:00

The production possibilities frontier (PPF) limits the ability to increase rabbit production without decreasing berry production.

The opportunity cost of catching one more rabbit is giving up 40 berries.

This cost is also known as the marginal cost in the context of the video.

✦

The opportunity cost of 20 more berries in scenario E is giving up one rabbit.

02:22

The opportunity cost is not a marginal cost in this case, as it involves the cost of 20 more units, not just one.

If expressed as a marginal cost, one more berry is equal to one twentieth of a rabbit.

The opportunity cost of one berry is one twentieth of a rabbit, or the marginal cost of an extra berry is also one twentieth of a rabbit.

✦

The video discusses the opportunity cost and marginal cost at different points in the curve.

05:11

Viewers are encouraged to think about the opportunity cost in different scenarios based on the data from the constructed table in the last video.

They are also encouraged to consider the cost of an extra rabbit or extra berries in terms of the other resource.

00:00 let's say we've been hanging out in

00:02 scenario e for a bunch of days on

00:04 average we've been catching one rabbit

00:06 but gathering 280 berries we were i

00:08 guess in a in a very mood so this is

00:10 scenario e right over here but now all

00:12 of a sudden we're in the mood for more

00:14 protein so let me write down we are in

00:16 scenario

00:18 scenario

00:19 e

00:20 and we're in the mood for more protein

00:22 and so we we want to think about what

00:24 are the trade-offs if we try to catch

00:26 more rabbits so what i want to do i want

00:28 to say if i want to catch one more

00:30 rabbit

00:31 one more

00:33 one more rabbit

00:35 what am i going to have to give up so if

00:37 i catch one more rabbit so i go from one

00:40 rabbit on average to two rabbits a day

00:42 so i'm really going from scenario e to

00:44 scenario d what am i going to give up so

00:46 this is plus 1 over here well i'm going

00:48 to give up i'm going to give up 40

00:51 berries

00:52 and you can see it visually right here

00:53 if i try to get one more rabbit i can't

00:56 go into this impossible this

00:58 unattainable part right over here i have

01:00 to stay on the production possibilities

01:02 frontier sometimes sometimes abbreviated

01:05 as pp as ppf or i guess the acronym for

01:09 it i should say is ppf but if i want one

01:12 more rabbit

01:13 the production possibilities frontier

01:15 drops off and i will have to give up 40

01:19 fruit so one more rabbit means that i

01:22 have a cost so i have to give up

01:25 i have to give up on average 40

01:28 40

01:29 berries and the technical term for what

01:31 i've just described is the the

01:34 opportunity cost of going after one more

01:36 rabbit is giving up 40 berries so let me

01:39 write this down the opportunity cost

01:42 opportunity

01:44 cost

01:46 of

01:47 one

01:48 more rabbit one more rabbit and this is

01:52 particular to scenario e as we'll see

01:54 it's going to change depending on what

01:56 scenario we are in at least for this

01:58 example so the opportunity cost of one

02:01 more rabbit is

02:02 is 40 berries

02:04 is 40 berries assuming we are in

02:07 scenario e one more rabbit i have to

02:10 give up 40 berries and another term when

02:13 we talk about the opportunity cost of

02:15 going after after producing i i guess we

02:18 could say the opportunity cost of

02:19 producing one more rabbit here when we

02:21 talk about the opportunity cost of

02:22 producing one more unit that's sometimes

02:24 called the marginal cost so this right

02:27 over here you can also view as the

02:29 marginal cost

02:31 marginal

02:32 cost in the context of this video our

02:34 costs are in terms of the thing that i'm

02:37 giving up the opportunity that i'm

02:39 giving up in in other scenarios you'll

02:41 see sometimes the marginal cost be given

02:43 in an actual monetary units like dollars

02:46 or whatever else what was the cost of

02:47 producing that extra unit that extra

02:49 widget right over there

02:51 but let's make sure we understand

02:53 opportunity cost so that's when we're

02:55 sitting in scenario e the opportunity

02:56 cost of one more rabbit but what's the

02:59 opportunity cost sitting in let's say

03:01 we're we we're tired of eating meat

03:03 we're sitting in scenario e and we want

03:04 to become vegetarians all together so we

03:06 want to go to scenario so we want to get

03:09 we want to go to scenario f essentially

03:10 not eat any rabbits and eat as much

03:12 fruit as possible so another thing that

03:15 you could ask in scenario e is the

03:17 opportunity cost

03:19 opportunity cost

03:22 opportunity cost of and just to make the

03:24 numbers easier i'm going to say

03:26 opportunity cost of 20 more berries 20

03:29 more berries

03:31 20 more berries is well i'm going to

03:34 give up i'm going to give up a rabbit

03:37 so over here what we're doing is we are

03:39 we're saying okay i want to increase my

03:41 berries by 20. but to do that i have to

03:44 decrease my rabbits by one so the

03:46 opportunity cost assuming we are in

03:48 scenario e the opportunity cost of 20

03:51 more berries is

03:53 one

03:54 is one

03:56 rabbit now this right over here is not a

03:58 marginal cost because i'm talking about

03:59 the cost of 20 more units not just one

04:03 if i want to write this as a marginal

04:05 cost of one more berry then i could just

04:07 say well if 20 berries is one rabbit you

04:10 could say you could essentially divide

04:12 both sides by 20. so one more berry

04:15 one more

04:17 one more berry and i'll assume for those

04:20 of you want to get technical that it's

04:21 somewhat linear right over here one more

04:23 berry if we divide both sides by 20 is

04:26 one more berry is one twentieth one

04:29 twentieth of a rabbit so if i go for one

04:33 extra berry sitting in scenario e on

04:36 average on average i'm gonna get one

04:38 twentieth less of a berry and when i

04:41 when i phrase it this way it is being

04:43 phrased it is being phrased as a

04:46 as a

04:48 marginal

04:49 as a

04:50 marginal cost now for those of you want

04:52 to get a little technical this is a

04:53 curve right over here so it might not be

04:56 exactly this we can't just well i don't

04:58 want to get too technical for for the

05:00 sake of this one right over here this is

05:02 a safe way to think about it the

05:03 opportunity cost of 20 more berries is

05:05 one rabbit but if you assume that this

05:07 is somewhat linear right over here it's

05:09 not so curved it's somewhat of a line

05:11 between those two points then the

05:13 opportunity cost of one berry is one

05:15 twentieth of a rabbit or the marginal

05:17 cost of an extra berry is one twentieth

05:20 of a rabbit and we could do it at

05:22 different points in this curve and i

05:23 actually encourage you to do

05:24 based on the data that we have in this

05:26 table that we constructed in the last

05:28 video and maybe this curve think about

05:29 what the opportunity cost is

05:32 in the different scenarios if you're in

05:34 scenario b and if you want an extra

05:36 rabbit how much is that going to cost

05:37 you in terms of

05:39 in terms of in terms of berries or if

05:41 you want more berries if you want more

05:44 berries what's that going to cost you in

05:45 terms of rabbits

💫 FAQs about This YouTube Video

1. What is the opportunity cost of catching one more rabbit in scenario E?

The opportunity cost of catching one more rabbit in scenario E is giving up 40 berries.

2. How is the opportunity cost related to the production possibilities frontier (PPF)?

The opportunity cost is related to the production possibilities frontier (PPF) as it represents the cost of forgoing the next best alternative when making a decision about resource allocation.

3. What does the marginal cost refer to in the context of the video?

In the context of the video, the marginal cost refers to the cost of producing an additional unit of a good, where the cost is measured in terms of the quantity of another good that must be given up.

4. How can the opportunity cost and marginal cost be calculated in scenario E?

In scenario E, the opportunity cost of catching one more rabbit is 40 berries, while the marginal cost can be calculated as the cost of one more rabbit in terms of the quantity of berries that must be given up.