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.
Formula
Steps
- 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
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.
Frequently asked 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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