How to Calculate Opportunity Cost (from a PPC or Table)
Per-unit opportunity cost equals what you give up divided by what you gain: units of the other good sacrificed ÷ units of this good produced.
The Opportunity Cost formula
Calculator
Enter two points from a PPC or table and get the per-unit opportunity cost in both directions.
Wheat starts at 20 tons in the worked example.
Cars start at 50 and fall to 30 as wheat expands.
Each extra unit of Good A costs 2 units of Good B over this range, which is the slope of the PPC between the two points.
- Gain in Good A
- 10
- Good B given up
- 20
- Opportunity cost of 1 unit of Good B
- 0.5 units of Good A
- Trade-off check
- Valid trade-off along the PPC
How to calculate Opportunity Cost, step by step
- 1Pick the two points being compared. Two rows of an output table or two points on the production possibilities curve.
- 2Find what is given up. The decrease in the other good (good B) when you move between the points.
- 3Divide by what is gained. Per-unit OC of good A = loss of B ÷ gain of A. Express it as 'units of B per unit of A.'
- 4Watch for input questions. If the table gives resources (hours/acres) per unit instead of output, the ratio flips: OC of A = inputs for A ÷ inputs for B.
Worked example: Opportunity Cost
Moving along a PPC, wheat rises from 20 to 30 tons while cars fall from 50 to 30. Opportunity cost of 1 ton of wheat = 20 cars ÷ 10 tons = 2 cars per ton.
Why the PPC bows outward
Opportunity cost is rarely constant, and the shape of the frontier is what tells you.
Take a country moving along its frontier in steps of 10 tons of wheat: cars run 60, 55, 45, 30, 10. The cost of each extra 10 tons of wheat is 5 cars, then 10, then 15, then 20. It rises every step.
That happens because resources are not equally good at everything. The first land moved into wheat is the land worst suited to making cars, so little is lost. Keep going and you are moving over car factories and skilled car workers, and the sacrifice climbs. This is the law of increasing opportunity cost, and it is what makes the PPC bow outward from the origin.
A straight-line PPC says the opposite: opportunity cost is constant, and resources are perfectly interchangeable between the two goods. That is the simplifying case used in comparative advantage problems, and it is why those tables give one clean ratio per country.
Implicit costs are opportunity costs
The idea shows up again in the cost chapter under a different name, and seeing that they are the same idea saves learning it twice.
Explicit costs are payments actually made. Implicit costs are the value of what you gave up: the salary an owner forgoes, the rent a firm could have collected on premises it occupies, the interest the owner's own capital could have earned elsewhere. Nobody writes a cheque for any of them, and every one is an opportunity cost.
That is exactly why economic profit subtracts them and accounting profit does not. An accountant reports what happened to the money; an economist asks whether the resources would have done better somewhere else.
So an economic profit of zero is not failure. It means the resources are earning precisely what their next-best use would pay, which is the normal long-run outcome in a competitive market and a perfectly good reason to carry on.
Opportunity Cost questions
Why does opportunity cost usually increase along a PPC?
Resources are not equally suited to all uses. As production of one good expands, less-suitable resources get pulled in, so each extra unit costs more of the other good, that's why the PPC bows outward.
How does opportunity cost decide comparative advantage?
The producer with the lower per-unit opportunity cost of a good has the comparative advantage in it and should specialize there, the basis for gains from trade.
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