Monday, 30 January 2012

Cost vs Oppotunity Cost! Dinner becomes expensive! (and ppf curve)

The cost of anything is what you pay for it whether the unit you are paying in money of a certain currency, in time or in trade/other mediums. For example the total cost of me going out to dinner with my friends would total around £20 (transport, food and drink costs).

The opportunity cost, is the next best alternative sacrificed or given up, which at the time of my invitation to dinner was only the evening time at home. Which I wouldn't have minded giving up because an evening out would trumps the stay in evening every time! However after arranging to go out I was asked by a neighbour to babysit the same evening. I politely declined as I did not want to let my friends down, but after deep consideration I phoned the neighbours back and said I was able to babysit. 

This was because going to the dinner before being offered the babysitting would have cost me, as mentioned, the straight cost of £20. Once offered the babysitting the cost for my evening out had more than doubled to around £50. The new opportunity cost of the dinner would now be the babysitting I declined and the payment I would have received (£30). This new offer would now mean that the cost of the dinner was much higher than before, ie the cost of the forgone £30 babysitting money and the £20 straight cost of the food and transport. So I apologised (a lot) and took the babysitting (after all I need every penny I can get as I am heavily fundraising for my school trip to India this summer and for a charity close to my heart called HCPT, to help handicapped children). I am very comfortable with this decision and my friends understand 100%!

PPF curve to help illustrate the opportunity cost as a topic

Sorry but this was the best photo I could get to illustrate the opportunity cost. This diagram is called a ppf curve or production possibility frontier. It shows by the blue line the maximum production  possibility for both goods. To change productivity from A to B there is a gain of 10 in the quantity of butter produced while only a 5 loss for the production of guns (so random I really couldn't find anything else!) and then when moving from C to D to gain 10 units of butter  there is a loss of 50 units of guns. Basically in this diagram it shows that in order to gain 10 units of butter different amounts of units of guns is needed to be forgone . The amount of guns that are needed to be given up to raise quantity of butter is the opportunity cost!

PHEW! please follow and spread the word about my blog to anyone and comment below if you have a blog of your own! whatever the content you blog about is! My aim is to gain all peoples interest in economics and understanding financial management! THANKS FOR READING! FOLLOW! AND COMMENT! <£ <3 xo Libby xo

1 comment:

  1. woow I'm so excited I found this blog :) I'm a beginner to economics and I had to study the micro economics in just 3 months and I did my exam last friday but I think I did well :) Now I have macro exam in 3 months time hope you post moree xxx