Opportunity cost and the production possibility frontier: a worked example
Opportunity cost describes what is forgone when a scarce resource is used for one option rather than an alternative.
Opportunity cost describes what is forgone when a scarce resource is used for one option rather than an alternative.
Why scarcity creates a choice
NCERT’s introductory microeconomics chapter explains how limited resources have competing uses. A production possibility frontier describes maximum feasible combinations of two outputs for given resources and technology.
In the simple model, a point inside the frontier indicates underused or wastefully used resources. A point beyond it cannot be produced with the stated resources and technology. The model’s assumptions matter.
Original numerical example
Imagine a workshop that can make either 12 stools and 4 desks, or 10 stools and 5 desks, using all available resources efficiently. Moving from the first combination to the second gains one desk and gives up two stools. The additional desk therefore has an opportunity cost of two stools for that move.
These numbers are invented for teaching. They are not a survey of real workshops. If a further desk required giving up three stools, its marginal opportunity cost would differ; do not assume every step has the same trade-off.
A point inside is not a new frontier
Suppose the same workshop currently produces only 8 stools and 3 desks despite having the capability described above. Producing more by using idle capacity is different from acquiring new productive capacity.
An outward shift concerns changed possibilities, such as additional resources or improved technology. Movement between combinations on an unchanged frontier concerns how existing capacity is allocated.
How to answer a short problem
Write down the output gained and the alternative output lost. Then express the loss per unit gained. Reversing that ratio answers a different question.
A production frontier is an explanatory model, not a claim that a real economy has only two goods. State the assumptions, identify the direction of the change and keep the units attached to the opportunity-cost answer.
Publication disclosure
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Frequently asked questions
Is opportunity cost necessarily a cash payment?
No. In the example it is the alternative output forgone.
Does reallocating output automatically shift the frontier?
No. A change in the output mix can occur along an unchanged frontier.