Foundations of Economics, 8th Edition

3.2 Opportunity Cost

MyEconLab Concept Video

You’ve seen that moving from one point to another on the PPF involves a trade­off. But what are the terms of the tradeoff? How much of one item must be forgone to obtain an additional unit of another item—a large amount or a small amount? The answer is given by opportunity cost—the best thing you must give up to get something (see previous page). We can use the PPF to calculate opportunity cost.

The Opportunity Cost of a Smartphone

The opportunity cost of producing a smartphone is the number of bikes forgone to get an additional smartphone. It is calculated as the number of bikes forgone divided by the number of smartphones gained.

Figure 3.4 illustrates the calculation. At point A, the quantities ...