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The Opportunity

Cost
Emilio Porta Pallais
eporta@worldbank.org
The Economic Problem
■ Scarcity: limited resources to meet infinite
needs
◆ If we could satisfy all of our needs, there
would be no need for economics
◆ In paradise, there are no economists…
■ We have to choose between alternatives
because of scarcity of resources: we can’t
have everything we want.
■ The opportunity cost of an item is the value
of the best alternative that we sacrifice when
we obtain the item.
The Economic Problem

Examples:
■ The opportunity cost of a chocolate

■ The opportunity cost of being here

■ The opportunity cost of building a


hospital or a school.
Production Possibilities Frontier
Production Possibilities Frontier
“The curve shows the maximum combinations of products that a country can produce
utilizing existing resources.”

Illustrates what we have to sacrifice in order to obtain something.

Coconuts

A
18 B
17 H
C
14

I D
9

0 1 2 3 4
Lobsters
Production Possibilities Frontier

Coconuts

A
20 B
18 H
C
15

I D
9

0 5 10 15 20
Lobsters
Production Possibilities Frontier

Y Effect of
Coconuts
technology
and learning
20
A
B Z
18 W
C
15

I D
9

0 5 10 15 20
Lobsters
Quantifying the sacrifice
 
Price of drinks $1, Price of the movie $5, Price of admission $10

12

10 0; 10
s knr D

1; 5

0 2; 0
0 0,5 1 1,5 2 2,5

Movie
Quantifying the sacrifice
Price of drinks $1, Price of the movie $5, Price of admission $5

12

10 0; 10
s kni r D

0; 5 1; 5

0 1; 0 2; 0
0 0,5 1 1,5 2 2,5

Movie
Quantifying the sacrifice
Price of drinks $2, Price of the movie $5, Admission $10

12

10 0; 10
s kni r D

0; 5 1; 5

1; 2,5
2

0 2; 0
0 0,5 1 1,5 2 2,5

Movie
Reflection:

Right to education and health


■ What does it mean?
■ How is it affected by scarcity?
■ How operationalize the exercise of this
right?
We have to choose!!!!
The Three Basic Questions
■ What to produce?
◆ Example: Should completion of secondary school be a
central objective? How much are we willing to sacrifice to
achieve this objective?
■ How?
◆ Combination of resources (or supplies) and technology to
produce the different goods
◆ Size of courses and institutions?
◆ What level of private enrollments?
◆ Use of ITC
◆ Textbooks, curriculum, etc.
■ For whom?
◆ Who will be the consumers of the goods we are producing?
◆ If everyone does not have access to primary or tertiary
education, how do we decide whom to assist?

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