How to calculate opportunity costs - YouTube

All right this video is going to go over my method for calculating an Opportunity Cost and it should be a fail-safe method. It

consist of three steps. The first one you may or may not have to do depending on the problem,

but I'm going to go over it anyways is

Calculate the Difference. The second, is Write the Sentence. The third is to Divide.

So if you're given a PPF

or a table that looks like this, you have different points or different types of production per hour or what have you.

Here you can produce 10 chairs or 0 TVs, 5 chairs or 10 TVs, 0 chairs or 20 TVs.

By calculate the difference, I mean that you take the difference between these points. So moving from A to B is a

difference of 5.

Moving from B to C is a difference of 5.

TVs

0 to 10 is a difference of 10. 10 to 20 is a difference of 10.

So we've calculated the difference. Now we need to write the sentence, so let's say that we're going from A to B

and we're getting 10 TVs. So the sentence would be,

the Opportunity Cost

of blank TVs is

blank chairs.

So now you fill in these values

with what the difference is, so the opportunity cost of 10 TVs is

blank chairs, so we have to give up 5 chairs.

So now we have our sentence the opportunity cost of 10 TVs is 5 chairs. Now we need to divide

both of these numbers

by 10 so that we get the opportunity

cost of 1 TV.

So divide both these numbers by 10 and

rewrite the sentence. The

Opportunity Cost of

10 divided by 10 is 1

TV is 5 divided by 10 or 1/2

chairs.

So the opportunity cost of one TV is 1/2 a chair.

If

you wanted to do it the other way, you could,

the OC

of

5

chairs

is

10 TVs and then divide both sides by this 5

So we get the opportunity cost of one chair, so one chair,

the opportunity cost of one chair is two TVS. And

by writing this sentence and going through the procedure each time, you shouldn't be able to mess it up. Now

if your teacher wants you to do things differently, you can, but use this method as a backup. Okay

so what if you're giving a different format where they show how many chairs,

TVs

or whatever goods and services you're doing can be produced per hour instead of that PPF format.

So here we have Jill and Tom and we can still do

the same thing we did before except now we don't need to calculate the difference. That's done.

Because it's already

calculated for us in terms of 5 chairs per hour or 3 TVs per hour.

So now all we need to do is write the sentence

and

divide.

So for Jill

the opportunity cost of

5 chairs is

3 TVs

Cos she can produce 5 chairs in an hour or she can produce 3 TVs in an hour.

You then divide

by 5 so that we get 1 chair and you get the opportunity cost of 1 chair is

3/5 of the TV.

That's for Jill. For Tom,

the OC of

10 chairs

is 2 TVs then divide both sides by 10 and you

get the opportunity cost of one chair is

1/5 of the TV. And you

can rewrite the sentences for the other way, such as the opportunity cost of 3 TVs is 5 chairs.

But go through that same method and by writing the sentence and then dividing you should be able to get it right. I know

Opportunity Cost can be tricky, but this should be a good way to always get this problem right.