Supply & Demand - Faculty.utep.edu

Opportunity Costhomework and spending time with your friends. Ifyou decide to spend extra hours on your homework,the opportunity cost of this action is lesstime with your friends.?.;­aking Choices The nation incurs opportunitycosts when it makes choices. The money spenton defense cannot at the same time be spent onhealth services; money spent on health servicescannot be spent on education, and so on. Whydoes every choice involve an opportunity cost?Opportunity CostSuppose that Alpha was producing at point aand that it wanted to move to point b. This isclearly possible so long as point b is not outside thefrontier. As shown in Panel B of Figure 1.6, theopportunity cost of producing the 100 additionalunits of butter is the 30 units of guns given up.As you can see, opportunity cost is a generalconcept that is expressed in terms of trade-offs, orin terms of things given up to get something else.Opportunity cost is not always measured in termsof dollars and cents. For example, you need to balancethe time you spend studying and doingThe Cost of Idle ResourcesIf some resources were not fully employed, thenit would be impossible for Alpha to reach its potential.To illustrate, suppose that Alpha was producingat point b in Panel A of Figure 1.6 when workers inthe butter industry went on strike. Butter productionwould fall, causing total output to change to point e.The opportunity cost of the unemployed resourceswould be the 100 units of lost production.Production at e could also be the result of otheridle resources, such as factories or land that areavailable but are not being used. As long as someresources are idle, the country cannot produce onits frontier-which is another way of saying that itcannot reach its full production potential, althoughit can produce at some point inside it.Economic GrowthThe production possibilities frontier representspotential output at a given point in time.Eventually, however, population may grow, the capitalstock may grow, and productivity may increase.If this happens, then Alpha will be able to producemore in the future than it can today.The effect of economic growth is shown inPanel C ofFigme 1.6. Economic growth made possibleby having more resources or increased productivitycauses the production possibilitiesfrontier to move outward. Economic growth willeventually allow Alpha to produce at point d,which it could not do earlier.Student Web Activity Visit the Economics: Principlesand Practices Web site at :t&ePQ.glencoe.com and clickon Chapter 1-Student Web Activities to learn moreabout what economists do.22 UNIT 1 FUNDAMENTAL ECONOM1C CONCEPTS