![]() ![]() Lumber and Rocks are two different resources – it’s like asking is 25X is better or worse than 40Y. + 25 Lumber – 40 Rocks = ? Result Trade-Off Formula In the same time to produce 25 lumber (30 minutes), he could have produced 40 rocks. By producing 25 lumber, our resource (worker) failed to be used in producing 40 rocks **. Opportunity Cost – The rocks he failed to produce. We hire the worker to produce lumber (Opportunity A). Opportunity result is negative (-) ~ this use of the resource is not worth the cost. Opportunity result is positive (+) ~ this use of the resource is worth the cost. Opportunity Benefit – Opportunity Cost = Opportunity Result Trade-Off Formula for Resource Utilization ![]() $140.00 – $150.00 = -$10.00 (not worth the cost)Īnother way to write this formula when choosing between two alternative uses of a resource is: A new company offers you a new job working the same 10 hours a day in exchange for $140.00. ![]() PracticeĪssume you are currently working 10 hours a day in exchange for a salary of $150.00. If Negative (-) results occur, the trade-off is not worth the cost. If Positive (+) results occur, the trade-off is worth the cost. It is the economists job to determine which is the better use.Ī Trade-off is determined through the following basic formula: He cannot accomplish both simultaneously (our resource is scarce). In the example at the beginning of this article, the worker (a resource) had two alternative uses: contributing labor to lumber or rocks. Parmesan was never really going to happen and can be disregarded. In choosing to use the chicken breast for Fajitas, what was your opportunity cost? The second-best alternative use – Chicken Soup is the opportunity cost. 3) Fajitas.Īfter careful assessment, you rank your uses of the chicken breast as follows in order of preference: The alternatives include: 1) Chicken Soup. You are deciding how best to use one chicken breast for dinner. But the only one that truly matters is the second-best alternative. Theoretically there may be unlimited potential alternative uses ($1.00 could also buy a ticket to Hong Kong or purchase a new dress or buy a video game). If you buy one cola, you sacrifice two candies (Opportunity Cost of B). If you buy two candies, you sacrifice a cola (Opportunity Cost of A). $1.00 can either to be spent on 2 candies (A) or 1 cola (B). When using a resource for one purpose, we sacrifice all alternative uses for that resource. Opportunity Costs are the value lost from sacrificing the opportunity to accomplish the second-best alternative use of the resource. In mathematical terms, the opportunity cost is calculated as the value lost from sacrificing the second-best alternative use of the resource. ![]() These are the potential uses of a resource that are sacrificed in the decision made. Where resources are involved in a trade-off, we must consider the Opportunity Cost. The same one dollar cannot purchase both food and a motorcycle at the same time for the same buyer. Scarce resources always involve trade-offs as the quantity is too limited to satisfy all needs. We previously (“ Trade-Offs“) ascertained that trade-offs are the costs associated with choices – the “Con” off-setting the “Pro”. So you lose all benefits of Opportunity A. If you use the worker for rocks, you cannot use the same worker for lumber.With Rocks, you can purchase building materials to improve your home.Rocks are now available to produce Stones. ![]()
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