Opportunity Cost Example Problem

In microeconomic theory, the opportunity cost, also known as alternative cost, is the value (not a benefit) of the choice of a best alternative cost while making a decision. A choice needs to be made between several mutually exclusive alternatives; assuming the best choice is made, it is the "cost" incurred by not enjoying the benefit that would have been had by taking the second best available choice. The New Oxford American Dictionary defines it as "the loss of potential gain from other alternatives when one alternative is chosen. " Opportunity cost is a key concept in economics, and has been described as expressing "the basic relationship between scarcity and choice. " The notion of opportunity cost plays a crucial part in attempts to ensure that scarce resources are used efficiently. Thus, opportunity costs are not restricted to monetary or financial costs: the real cost of output forgone, lost time, pleasure or any other benefit that provides utility should also be considered an opportunity cost.

The negative slope of the PPF illustrates the fact that larger quantities of cars correspond to a smaller amount of milk, and vice versa. This happens because all the economy's resources are already in use, and therefore obtaining more cars would always require sacrificing some milk. In economic terms, the negative slope is due to the presence of opportunity cost.

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