Thursday, February 23, 2017

218 Opportunity cost

Let's say the two things we produce are corn and beef. We can use land to either produce corn or produce beef.

The next thing we need to know in order to calculate opportunity cost is how much corn could we produce compared to how much beef we could produce. And remember that we're using the same amount of resources, so this kind of problem really is going to give us a basis for comparing two alternative choices.

Let's say that in Country A, we can either produce 50 tons of corn, or as an alternative, we can produce 25 tons of beef. This is our tradeoff between producing these two things. Now we have all the information we need to calculate opportunity cost, but we need to know which opportunity cost we're trying to measure based on which possibility we want to choose.

Let's start by looking at it from the corn perspective. The opportunity cost of producing 50 tons of corn is equal to how many tons of beef we could have produced, which of course is 25 tons. Therefore, the opportunity cost is found by solving this equation:

50 tons of corn = 25 tons of beef

What we really want to know is how much beef we could have produced if we choose to produce 1 ton of corn, but the question gave us 50 tons. To reduce this equation down, we divide each side by 25 and this gives us:

2 tons of corn =1 ton of beef

And then reducing it down one more time, gives us:

1 ton of corn = ½ ton of beef.

That's our answer. The opportunity cost of producing a ton of corn is ½ a ton of beef.

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