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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
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: