When referring to opportunity costs, investors often see it as the benefit you would have received by taking an alternative financial action.
The difference in return between a chosen investment and your forgone alternative is essentially your opportunity cost.
Let's say we've been hanging out in scenario E for a bunch of days. But now all of a sudden, we're in the mood for more protein. So what I want to do-- I want to say, if I want to catch 1 more rabbit, what am I going to have to give up? I have to stay on the production possibilities frontier, sometimes abbreviated as PPF.
On average, we've been catching one rabbit, but gathering 280 berries. So if I catch one more rabbit-- so I go from 1 rabbit on average to 2 rabbits a day. Or I guess the acronym for it, I should say, is PPF. And the technical term for what I've just described is the opportunity cost of going after 1 more rabbit is giving up 40 berries. The opportunity cost of 1 more rabbit-- and this is particular to scenario E.
If you're seeing this message, it means we're having trouble loading external resources on our website.
If you're behind a web filter, please make sure that the domains *.and *.are unblocked. And so we want to think about what are the trade-offs if we try to catch more rabbits? If I try to get 1 more rabbit, I can't go into this impossible, this unattainable part right over here.So I'm really going from scenario E to scenario D. But if I want 1 more rabbit, the production possibilities frontier drops off, and I will have to give up 40 fruit. As we'll see, it's going to change depending on what scenario we are in, at least for this example.So the opportunity cost of 1 more rabbit is 40 berries, assuming we are in scenario E. And another term when we talk about the opportunity cost of going after-- after producing I guess you could say-- the operating cost of producing 1 more rabbit here, when we talk about the opportunity cost of producing 1 more unit, that's sometimes called the marginal cost.So we want to go to scenario F-- essentially not eat any rabbits and eat as much fruit as possible.So another thing you could ask in scenario E is the opportunity cost of-- and just to make the numbers easier-- I'm going to say opportunity cost of 20 more berries is, well, I'm going to give up a rabbit.If you choose one alternative over another, then the cost of choosing that alternative becomes your opportunity cost.If you choose not to go to work today, for example, your opportunity cost becomes your lost wages.The opportunity cost of 20 more berries is 1 rabbit, but if you assume that this is somewhat linear right over here-- it's not so curved, it's somewhat of a line between those 2 points-- then the opportunity cost of 1 berry is 1/20 of a rabbit.Or the marginal cost of an extra berry is 1/20 of a rabbit.But let's make sure we understand opportunity cost.So that's when we were sitting in scenario E, the opportunity cost of 1 more rabbit.