Scarcity, Choice & Opportunity Cost
Opportunity cost is what you give up to get something — and it is often not the price tag. On a PPC it is the slope: if the slope is −3 with coconuts on the horizontal axis, one more coconut costs three fish.
Three definitions
- Scarcity principle
- Having more of something means having less of something else.
- Cost–benefit principle
- Take an action if and only if its benefits outweigh its costs.
- Opportunity cost
- What you give up to get something — the value of the next best alternative. For something you buy, that is usually just its price. The exam tests the cases where it is not.
When the cost is not the price tag
| Activity | Out of pocket | Plus the part they test |
|---|---|---|
| Going to college | Tuition, fees, books | Forgone earnings. At average earnings around $60,000, the bigger cost at a public university. |
| Painting your own house | Paint, brushes | The value of your time |
| Using a ticket whose price changed | Already paid — sunk | What you could sell it for now, plus your time |
The production possibilities curve
What moves it, and what does not
| Event | What happens |
|---|---|
| More labor (immigration, population growth), more capital, better technology | Frontier shifts out |
| Recession, unemployment | Interior point. Resources still exist; they are idle |
| More investment goods today | Bigger PPC tomorrow. US production is roughly 75% consumption, 25% gross investment |
| Bowed-out (concave) shape | Rising opportunity cost — best-suited resources get used first (Unit 2) |
Rules that earn points
- Asked for a cost: name the out-of-pocket cost and the forgone alternative. The second half carries the credit.
- Turn any slope into a sentence — "one more X costs Y units of Z."
- Only labor, capital and technology shift the PPC. Everything else moves you along it or inside it.
- Productive efficiency = any point on the curve: no more of one good without less of another.
- Treating sunk costs as costs. What you already paid for the ticket is irrelevant.
- Forgetting forgone earnings in the college question. It has appeared on a real exam.
- Drawing a recession as an inward shift of the PPC. It is an interior point.
You enroll at Berkeley for a year instead of working full time. The opportunity cost of that year is best measured as:
- ATuition and fees only
- BTuition and fees plus forgone earnings
- CTuition, fees, room and board
- DForgone earnings only, since tuition is sunk once paid
Answer
B — tuition and fees plus forgone earnings.
Enrolling costs you the money paid to the university and the wages you gave up. With average earnings around $60,000, the forgone wages are likely the larger piece at a public university.
C is the trap: it swaps in room and board, which you would pay anyway whether or not you enrolled, and still omits forgone earnings.
You bought a concert ticket for $80. By showtime, identical tickets resell for $300. The opportunity cost of attending is:
- A$80, what you paid
- B$300 plus the value of your time
- C$380, purchase price plus resale value
- D$220, the gain you would make by reselling
Answer
B — $300 plus the value of your time.
The cost of using the ticket is what you could sell it for now. If you would not pay $300 for the experience today, going is the wrong call.
A is the trap: the $80 is sunk. It is identical whether you attend or resell, so it cannot affect the decision.
Which event shifts an economy's PPC outward?
- AA recession ends and idle workers are rehired
- BImmigration raises the size of the labor force
- CConsumers shift spending from investment goods to consumption goods
- DUnemployment rises sharply
Answer
B — immigration raises the labor force.
Only more labor, more capital or better technology moves the frontier itself.
A is the trap: rehiring idle workers moves the economy from an interior point back onto the existing frontier. The frontier never moved, because the resources existed the whole time.
A PPC has consumption goods on the vertical axis and investment goods on the horizontal axis. At a point where the slope is −2:
- AOne more investment good costs 2 consumption goods
- BOne more consumption good costs 2 investment goods
- COne more investment good costs ½ a consumption good
- DThe economy is inside its frontier
Answer
A — one more investment good costs 2 consumption goods.
The slope is minus the opportunity cost of the good on the horizontal axis, which here is investment goods.
B is the trap: it reads the slope against the vertical-axis good. That flips the ratio — one more consumption good would cost ½ an investment good.
List and briefly discuss the most important costs of attending UC Berkeley.
Model answer
Two costs dominate. Tuition and fees — the money actually paid to the Regents. And forgone earnings — the wages you could have earned working full time instead of enrolling.
With average annual earnings near $60,000, forgone earnings are likely the larger cost at a public university like Berkeley, though not at an expensive private one. Books are a real secondary cost. Room and board is only partly a true cost of college, since you would have to eat and live somewhere anyway.
- Forgone earnings named explicitly. An answer without them does not earn full credit.
- Tuition and fees named as the out-of-pocket cost.
- Ranking the two, with the $60,000 figure or an equivalent reason.
- Noting that room and board is not fully a cost of college.
Draw a PPC with consumption goods on the vertical axis and investment goods on the horizontal axis. Mark an efficient point, an unattainable point, and a recession. Then show what the future PPC looks like if the economy picks a high-investment point today.
Model answer
Bowed-out curve from the C-intercept to the I-intercept. An efficient point sits on the curve; an unattainable point sits beyond it; a recession sits strictly inside it, because the resources exist but are idle.
A high-investment point today means more machines, buildings and R&D tomorrow, so draw a second PPC further out for the future. A high-consumption choice today gives a future PPC much closer in. This is why investment matters for growth — it reappears in Unit 19.
- Curve bowed out, both axes labeled C and I.
- Recession drawn inside the frontier, not as an inward shift.
- Unattainable point drawn beyond the frontier.
- A second, further-out frontier drawn and labeled as the future PPC.