Course

Opportunity Cost

Instructor: Alex Tabarrok, George Mason University

Opportunity Cost : The loss of possible gain from alternatives when a choice is made. This is from the video “ The Supply Curve Shifts ” in the Principles of

Opportunity Cost: The loss of possible gain from alternatives when a choice is made. This is from the video “The Supply Curve Shifts” in the Principles of Microeconomics course.

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Transcript

Our final supply curve shifter changes an opportunity cost is perhaps the trickiest because we're usually thinking about cost in terms of dollar costs. But we have to keep in mind that the fundamental concept of cost is opportunity cost. Let's apply this and I think it will become fairly easy to understand.


Inputs which are used in production have opportunity costs. They can be used to produce many different things. And sellers will choose to employ their inputs in the production of the highest priced final good.


For example, what happens to the supply of soy beans when the price of wheat increases? Here's a hint. Farmers can use their land to grow soy beans or to grow wheat. Farmers have a choice about their use of land. So what happens to the supply of soy beans when the price of wheat increases? Let's look at this with the graph.


Here's our initial supply curve for soy beans. we will label this low opportunity cost, that means that the price of wheat is low. There's not much else useful to do with this land other than to grow soy beans. However, when the price of wheat goes up, well then the opportunity cost of growing soy beans has gone up. When the price of wheat was low, the cost of growing so beans was low because what else were you going to do with the land? Now that the price of wheat has gone up, there's an alternative, there's an opportunity. The farmers could instead grow wheat. That means that farmers are going to take some of their land out of soy bean production and move it into wheat production. So to produce the same quantity of soy beans the farmers are going to require a higher price, because their costs are now higher, their alternative, their opportunity cost is higher.

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