# Microeconomics/Opportunity Cost

Every day everyone makes a myriad of decisions, choosing between two or ten or even hundreds of different possibilities. Action tends to be the best indicator of preference, of what people actually want, but in doing so people deny themselves all other options. This is the essence of scarcity: everyone can't have everything all at once.

With every expressed preference there exists a next-best option: something you would have done if the first option wasn't available. This is called the opportunity cost. Because you do one thing, you've lost the opportunity to do something else. Opportunity costs can be thought of as a sort of regret, pain people bear as they imagine what they could be enjoying even if they are enjoying what they are doing right now more. Another way to think about opportunity costs is money value; profit you would have made if you did something else, such as a business venture.

## Understanding Opportunity Cost and Benefit

Opportunity Cost can be understood by looking at the first four of Mankiw's Principles of Economics

• The cost of something is what you give up to get it.
• Rational people think at the margin.
• People respond to incentives.

To exemplify these four principles we will use the following example:
It is a Friday night and you have the following options of things to do, in order of how much you want to do them (most enthusiasm to least enthusiasm):

1.)See a movie with a partner.
2.)See a movie with your buddies.
4.)Play chess against yourself.
5.)Study.

### Production possibility curve

Opportunity cost is the substance of production possibility curves, the opportunity cost of choices in current resource deployment on current production and future production capability.

The production possibility curve is a quarter curve 12pm-3pm, on a graph of two competing possibilities of production, with each product's quantity being the X and Y axes respectively.

Anything within the region left and under the curve, is the production possibilities, and represents what can be produced given the available resources.

Production is fully efficient on points lying on the curve, as resources are fully allocated, including employment.

If X is the horizontal axis quantity, then the right most, lowest point of the curve, shows maximum production of X, and no production of Y. Conversely, the left most, highest point, shows maximum production of Y, and no production of X.

The curve can grow outward, if relevant technology increases, or resources increase, the former representing increased maximum efficiency achievable.

An illustrative example might be X is the production of cars, and Y is the production of mobile consumer items. Assuming that enlarging the production possibility curve is good, what is the optimal current production of X and Y, that will increase the production possibility curve of X and Y in the future?

Another way of framing the example, X is the production of cars and mobile electronic consumer items, Y is education, completed research papers, public-owned solar panel production companies, and public, independent labor legislation (to increase productivity by reducing health-damaging effects of work commitments).