Principles of Microeconomics / Unit 1 MIC 0018 worked example, 60 to 90 seconds
Opportunity Cost from Two Prices
The idea
When income is fixed and two goods have fixed prices, the opportunity cost of one good is its price divided by the price of the other. First find the endpoints: income divided by each price gives the most of that good the person could buy alone. Second, the slope of the line joining the endpoints is the horizontal good's price over the vertical good's price. Third, read the slope as a sentence: one unit of this costs so many units of that. The answer depends only on the price ratio, never on income.
In practice
Worked example: a student has forty dollars a week, notebooks cost five dollars and pens cost one dollar. Forty dollars buys eight notebooks, or forty pens. So one notebook costs five pens, and one pen costs a fifth of a notebook. Double the budget to eighty dollars and the endpoints double to sixteen and eighty, but one notebook still costs five pens.
Where people slip
Two traps. The opportunity cost of each good is the reciprocal of the other, so if a notebook costs five pens then a pen costs a fifth of a notebook. And a change in income moves the line without tilting it, so it changes what is affordable but not what anything costs in terms of the other good.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
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