Allocative efficiency and marginal benefit

WEBVTT
Kind: captions
Language: en

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We've already spent a
lot of time thinking

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about these six different
scenarios, all of which

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sit on the production
possibilities frontier, which

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means that in any
of these scenarios,

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we have achieved
productive efficiency.

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And it's true not just
of these scenarios.

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It's true of any of the
points on this curve.

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So you have achieved,
any point on that curve,

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productive-- let
me give ourselves

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some real estate on
the right-- efficiency.

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Which means, another
way to think about it,

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is that as soon as you're
at any point on that curve,

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if you want any more
of one of these things

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you have to give up
some of the other.

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So for example, if
you're at point C,

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and if you want more rabbits,
if you want 1 more rabbit,

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you're going to have to
give up some berries.

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Or if you're at point C
and you want more berries,

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you're going to have to
give up some rabbits.

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And that's true of any point
on the production possibilities

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frontier.

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A point over here-- let me
do this in a different color.

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So let's say at this
point right over here,

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you have not achieved
productive efficiency here

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because you can get more
rabbits without having

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to give up any berries.

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And you could get to Scenario
B. Or you could get more berries

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and not have to
give up any rabbits,

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and you would get to Scenario D.

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So this right over
here is inefficient.

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Now, all of these,
that's all good.

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All of these five
or six scenarios,

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we've achieved
productive efficiency.

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But which of these do we pick?

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How do we decide to
allocate our time?

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So what I want to talk
about in this video

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is allocative efficiency.

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And it's somewhat subjective,
based on the preferences of,

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if we are the hunter gatherer,
based on our preferences.

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But at least it
gives us a framework

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for thinking, which of these
meets our preferences the best.

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And to do that, I will review a
little bit from the last video.

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In the last video, we talked
about the marginal cost

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of each incremental rabbit.

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Or we said the opportunity cost
of each incremental rabbit,

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and the opportunity cost of
one incremental unit, that

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really is just
the marginal cost.

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So let's just write these
different scenarios.

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So let's write the scenarios,
scenario for short,

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scene for short.

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And then let's think
about the marginal cost

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of 1 incremental rabbit.

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I'll just draw a rabbit here.

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And it's going to
be given in berries.

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All right.

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Let's start with
Scenario F. And this

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is all review from
the last video.

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Sitting in Scenario F, if we
want to get 1 extra rabbit,

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we are going to have
to give up 20 berries.

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In Scenario E, if we're
sitting in Scenario E,

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and we want even 1
more rabbit we now

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have to give up 40 berries.

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So the marginal cost at
that point of 1 more,

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I keep wanting to say squirrel,
1 more rabbit is 40 berries.

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Now let's go to Scenario D.
And I encourage you to pause

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and do this yourself.

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It'll help if you
kind of work it out.

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Scenario D, the cost of 1
extra rabbit is now 60 berries.

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You go to Scenario C. The
cost is now 80 berries.

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So in Scenario C the
cost is now 80 berries.

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Finally you got to
Scenario B and the cost

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of, sitting in Scenario B, of
getting 1 extra rabbit-- you're

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going to have to
give up 100 berries.

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And I won't even
go into Scenario A,

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because it will be impossible
for you to have any more

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rabbits and you have no
more berries to give up.

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So these are all the
possible scenarios

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and the marginal costs of them.

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And we can actually
plot them on a line.

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So let me do that
right over here.

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This will be useful.

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So let me draw one axis right
over here, one axis over here.

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And this is, let's call this
the different scenarios.

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So this-- let me do
in the same order.

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Let's call this
Scenario F, Scenario E.

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I'll just do it in
one color right now.

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Scenario E, Scenario D, Scenario
C and Scenario B. Actually,

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let me-- instead of
doing it that way,

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let me just talk
about it in terms

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of the number of
squirrels I have.

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So the number of
squirrels that I have.

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So in Scenario F, if you
remember, in Scenario F-- oh,

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not squirrels, rabbits.

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In Scenario F you
have 0 rabbits.

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Scenario F you have 0 rabbits.

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So let's say 0,
1, 2, 3, 4, and 5.

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And so this is the number
of rabbits, not squirrels,

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the number of rabbits
that you right now

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are able to catch,
on average, each day.

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And then in the vertical
axis, right now,

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I want to put the
marginal cost in berries.

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And let's see, it goes
from 20 up to 100.

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So let's say that this is
20, 40, 60, 80, and 100.

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So Scenario F, that's
when we had 0 rabbits.

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And the marginal cost of
trying to get another rabbit,

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you would have to
give up 20 berries.

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So that is Scenario
F right over there.

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Scenario E, that's one where
we had 1, where we already

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had 1 rabbit and we are
thinking about the marginal cost

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of getting another one.

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So that's scenario E,
is right over there.

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This is scenario D.
Marginal cost is 60.

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We already have 2
rabbits and we are

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thinking about getting a third.

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That's Scenario D.

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And then Scenario C, we
already have 3 rabbits,

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thinking about getting a fourth.

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That's Scenario C.
And then finally, we

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have Scenario B where we
already have 4 rabbits

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and we're thinking
about getting a fifth.

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And we would have to
give up 100 berries

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to get that fifth rabbit.

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So that's Scenario
B right over there.

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So what I've just done is
plotted the marginal cost

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along-- these are points on,
essentially, our marginal cost

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curve, our marginal
cost as a function

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of the number of
rabbits we have.

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So let me connect all the dots.

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And then this scenario
just happened to be a line.

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Doesn't always have to be a
line but in many introductory

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economics courses, it's
often a line for simplicity.

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So let me make this a
line right over here.

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This is our marginal
cost as a function

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of the number of
rabbits we have.

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And actually, I should
probably draw this axis,

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I should probably draw--
let me copy and paste this.

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So let me cut this.

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Let me cut that and then let
me paste it, because it really

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should sit on the 0
point right over there.

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And ignore that little
line right over there.

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So there you have marginal
cost as a function of berries.

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But we still don't know
which scenario to pick.

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And to think about that, I
want to introduce something

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called the marginal benefit.

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And I'll write it as
MB, the marginal benefit

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of an incremental rabbit.

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And once again, we're going
to write it in berries.

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And the way to think
about the marginal benefit

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is, if we are the
hunter-gatherer we're saying,

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if we're sitting in one of
these scenarios, how much would

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we paid to some hypothetical
convenience store in berries--

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maybe that convenience
store only sells bunnies

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and they only accept
berries-- how much would we

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pay to them in berries
for an extra rabbit?

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And let's not even look at
this thing right over here.

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So if we're sitting in Scenario
F, we're sitting in Scenario F.

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And you remember Scenario
F is right over here.

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We have no rabbits.

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How much would we
be willing to pay?

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We have no rabbits and we
actually have a ton of berries.

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So in Scenario F right
here, we have no rabbits

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and we have 300 berries.

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If we have no rabbits
and a lot of berries,

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let's say, we'll say, we
have a lot of berries.

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We might be in the
mood for a rabbit.

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We would be willing to pay a
lot in berries for a rabbit.

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So let's say we would pay 100.

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We would pay 100 berries to
that hypothetical convenience

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store for a rabbit.

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Now let's say that we're in
Scenario E. We're in Scenario

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E, how much would we pay to that
hypothetical convenience store?

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Well, in Scenario E we
already have 1 rabbit

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and we have fewer berries.

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So we need a rabbit less and
we have fewer berries to give,

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so we're not willing to
give quite as many berries

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for another rabbit.

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So maybe we'll only
give 80 berries.

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Then you go to Scenario D.

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We already have 2 rabbits and
we have even fewer berries

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so we're willing to
give even fewer berries

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for another rabbit.

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This is what we would pay
to a convenience store,

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just based on thinking about
it, our current preferences.

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Then we can go all
the way to Scenario C.

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And it is subjective.

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It's not like a
measurable thing.

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It's just based on this
person's preferences,

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this hunter-gatherer's
preferences.

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Scenario C, well, they already
have more rabbits, even

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fewer berries.

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So they'll pay even less.

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And then finally
Scenario B. They

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have a good number of rabbits
and even fewer berries.

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They would be willing
to pay very little

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for an incremental rabbit.

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So let's plot the
marginal benefit

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as a function of the number of
rabbits that they already have.

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So if we go to Scenario
F, the marginal benefit,

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doing that little thought
experiment is 100.

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In Scenario E, the
marginal benefit,

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how much you would
hypothetically

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be willing to pay in
berries, is now 80 berries.

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In Scenario D it is 60 berries.

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In Scenario C it is 40 berries.

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So Scenario C is
right over here.

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So in Scenario C
it's 40 berries.

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And then in Scenario
B it is 20 berries.

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So in Scenario B it is 20
various, just like that.

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So now we're not just
plotting the marginal cost.

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We're plotting the marginal
cost and the marginal benefit

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in berries.

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And the marginal
benefit curve-- and it's

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really a line here, once
again, for simplicity--

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looks like that.

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Now, given this-- so this is
the marginal benefit curve.

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Marginal benefit is a function
of the number of rabbits

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that we already have.

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And this is the marginal
cost as a function

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of the number of
rabbits we already have.

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And so when I say
E, this is actually

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Situation E. That's Situation
D. This is also Situation C

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and this is also-- this is the
marginal benefit at Situation

00:11:19.760 --> 00:11:23.170
B. So given this, what
would I rationally do?

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If these really
are my preferences,

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what would I rationally do?

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So if I'm sitting here in
Situation F, I have no rabbits.

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I already know that it
would cost me 20 rabbits

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to try to get an
incremental one.

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But I've already said that
I'd be willing to pay 100.

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Sorry, it would
cost me 20 berries

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to get an incremental rabbit.

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But I've already said
that I'm willing to pay

00:11:44.740 --> 00:11:47.190
100 berries to get an
incremental rabbit.

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So I would want to
move along the curve.

00:11:51.290 --> 00:11:56.810
So I would definitely
want to get more rabbits.

00:11:56.810 --> 00:11:59.520
I said that I'm willing to
pay 100 berries for a rabbit

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and it would only cost me
20 berries for a rabbit.

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So I'm saying that I
want to get more rabbits.

00:12:06.150 --> 00:12:08.990
And another way to look at
this visually, marginal benefit

00:12:08.990 --> 00:12:11.500
is much higher than
marginal cost here.

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So I'm willing to go forth
and try to get more rabbits.

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That's even true in Scenario
E. The marginal benefit

00:12:19.350 --> 00:12:21.830
of an incremental rabbit
is worth much more to me

00:12:21.830 --> 00:12:23.880
than the marginal cost,
so I'm willing to try

00:12:23.880 --> 00:12:25.580
to get more rabbits.

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So in Scenario E I'm still
trying to get more rabbits.

00:12:29.620 --> 00:12:33.300
I still want to move along
the production possibilities

00:12:33.300 --> 00:12:37.650
frontier in this
general direction.

00:12:37.650 --> 00:12:43.355
Now what happens as
I get closer to D?

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So if I'm in this
scenario right over here,

00:12:45.360 --> 00:12:47.480
and this isn't one of
our labeled scenarios,

00:12:47.480 --> 00:12:49.880
but if I'm right
over there-- still,

00:12:49.880 --> 00:12:53.060
my marginal cost is lower
than my marginal benefit.

00:12:53.060 --> 00:12:55.970
So I'll still want to get
more rabbits, all the way

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until I'm Scenario D.

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In Scenario D I'm a
little bit neutral.

00:12:58.890 --> 00:13:00.820
I'm willing to pay 60
berries for a rabbit,

00:13:00.820 --> 00:13:02.320
but that's exactly
how much I'd have

00:13:02.320 --> 00:13:04.430
to give up to get
that extra rabbit.

00:13:04.430 --> 00:13:06.940
So let's just think about
Scenario D for a little bit.

00:13:06.940 --> 00:13:08.440
I'll just circle
it right over here.

00:13:08.440 --> 00:13:10.760
Because it looks
kind of interesting.

00:13:10.760 --> 00:13:12.290
Now, let's go--
now would we want

00:13:12.290 --> 00:13:14.530
to do anything
beyond Scenario D?

00:13:14.530 --> 00:13:16.800
So if I'm at this
point right over here,

00:13:16.800 --> 00:13:18.440
if I'm working
enough on average,

00:13:18.440 --> 00:13:21.640
to say get 2 and
1/2 rabbits a day,

00:13:21.640 --> 00:13:23.760
would I-- does this
make sense for me

00:13:23.760 --> 00:13:25.880
to try to get any more rabbits?

00:13:25.880 --> 00:13:27.895
Well, at that point
the benefit of getting

00:13:27.895 --> 00:13:30.767
an incremental rabbit
is smaller than the cost

00:13:30.767 --> 00:13:31.600
of getting a rabbit.

00:13:31.600 --> 00:13:34.220
At that point, if I try
to get another rabbit,

00:13:34.220 --> 00:13:38.941
I'm getting less benefit from
it than the cost associated

00:13:38.941 --> 00:13:39.440
with it.

00:13:39.440 --> 00:13:42.230
So I definitely don't
want to move past D.

00:13:42.230 --> 00:13:45.410
So I achieve
allocative efficiency

00:13:45.410 --> 00:13:49.770
where my marginal cost and
my marginal benefit is equal.

00:13:49.770 --> 00:13:51.800
So based on the way
that I've rigged

00:13:51.800 --> 00:13:54.150
the numbers in this
example right over here,

00:13:54.150 --> 00:13:57.800
you want to settle
on Scenario D.

00:13:57.800 --> 00:14:01.070
We have achieved allocated
efficiency over there.

00:14:01.070 --> 00:14:05.030
The marginal cost as a
function of our rabbits

00:14:05.030 --> 00:14:09.510
and the marginal benefit of our
function of rabbits is equal.


Increasing opportunity cost

WEBVTT
Kind: captions
Language: en

00:00:00.464 --> 00:00:01.880
What I want to do
in this video is

00:00:01.880 --> 00:00:05.280
think about how the
opportunity cost can change

00:00:05.280 --> 00:00:07.946
as we move from
scenario to scenario.

00:00:07.946 --> 00:00:10.070
And this is going to be
particular to this example,

00:00:10.070 --> 00:00:11.528
but it's a phenomenon
that you will

00:00:11.528 --> 00:00:14.230
see in many economic scenarios.

00:00:14.230 --> 00:00:17.030
So let's say we're
starting off in Scenario F.

00:00:17.030 --> 00:00:18.210
We are vegetarians.

00:00:18.210 --> 00:00:20.230
We are only getting berries.

00:00:20.230 --> 00:00:23.620
We are not spending any
time going after rabbits.

00:00:23.620 --> 00:00:26.450
But now we're starting to,
I guess, crave protein.

00:00:26.450 --> 00:00:29.210
And we say, well, what is
going to be the opportunity

00:00:29.210 --> 00:00:31.920
cost if I go for
that extra rabbit?

00:00:31.920 --> 00:00:35.740
If I go for that extra rabbit,
then what's going to happen?

00:00:35.740 --> 00:00:38.850
Well, I'm going to have to stay
on my production possibilities

00:00:38.850 --> 00:00:39.790
frontier.

00:00:39.790 --> 00:00:41.680
And so I'm going to
move to Scenario E.

00:00:41.680 --> 00:00:44.200
So if I go after that
one extra rabbit,

00:00:44.200 --> 00:00:48.990
I'm going to give up 20 berries.

00:00:48.990 --> 00:00:50.959
So my opportunity
cost in Scenario F,

00:00:50.959 --> 00:00:52.500
sitting in Scenario
F, of going after

00:00:52.500 --> 00:00:55.430
that 1 rabbit is 20 berries.

00:00:55.430 --> 00:00:56.990
Now let's keep going.

00:00:56.990 --> 00:00:59.060
What happens if
I'm in Scenario E?

00:00:59.060 --> 00:01:01.020
I'm already, on
average, eating 1 rabbit

00:01:01.020 --> 00:01:02.610
or finding 1 rabbit a day.

00:01:02.610 --> 00:01:04.620
And I want to go
to 2 rabbits a day.

00:01:04.620 --> 00:01:05.930
What am I going to give up?

00:01:05.930 --> 00:01:07.680
Let me do that in
that same color.

00:01:07.680 --> 00:01:09.430
What will I give up?

00:01:09.430 --> 00:01:14.540
Well, now I am going
to give up 40 berries.

00:01:14.540 --> 00:01:16.210
This is interesting.

00:01:16.210 --> 00:01:18.470
Now let's say
we're in Scenario D

00:01:18.470 --> 00:01:20.970
and we want even more rabbits.

00:01:20.970 --> 00:01:24.660
We're really starting to
become carnivores now.

00:01:24.660 --> 00:01:26.290
What am I going to give up?

00:01:26.290 --> 00:01:28.730
Well, I'm going to
give up 60 berries.

00:01:28.730 --> 00:01:32.580
If I'm able to get 3 rabbits,
every day, on average then

00:01:32.580 --> 00:01:35.750
I'm only going to get 180
berries now instead of 240.

00:01:35.750 --> 00:01:37.310
And let's just keep going.

00:01:37.310 --> 00:01:40.270
So if I want yet another
rabbit every day,

00:01:40.270 --> 00:01:45.060
then I'm going to have
to give up 80 berries.

00:01:45.060 --> 00:01:47.760
And then finally, just to
feel some sense of completion,

00:01:47.760 --> 00:01:49.950
if I become a complete
carnivore and if I

00:01:49.950 --> 00:01:51.840
want to get on average,
5 rabbits a day,

00:01:51.840 --> 00:01:54.240
I'm going to have to give
up another 100 berries

00:01:54.240 --> 00:01:57.260
and go to not having
any berries at all.

00:01:57.260 --> 00:01:59.300
And so you might see
something interesting.

00:01:59.300 --> 00:02:01.400
The more squirrels--
sorry, not squirrels

00:02:01.400 --> 00:02:03.770
although I guess they're
similar-- the more rabbits

00:02:03.770 --> 00:02:06.690
that I'm going
after, every time I

00:02:06.690 --> 00:02:09.550
try to go after another
incremental rabbit I'm

00:02:09.550 --> 00:02:11.790
giving up more and more berries.

00:02:11.790 --> 00:02:14.640
My opportunity
cost is increasing.

00:02:14.640 --> 00:02:17.330
And so this phenomenon,
it's not always the case

00:02:17.330 --> 00:02:20.770
but it's the case in this
example, increasing opportunity

00:02:20.770 --> 00:02:21.270
cost.

00:02:24.770 --> 00:02:27.190
Increasing
opportunity cost as we

00:02:27.190 --> 00:02:29.300
increase the number of
rabbits we're going after.

00:02:29.300 --> 00:02:30.716
And you could do
it the other way.

00:02:30.716 --> 00:02:32.882
You could say, OK,
as we increase--

00:02:32.882 --> 00:02:34.590
especially if you did
it on a unit basis,

00:02:34.590 --> 00:02:38.290
if you said every incremental
berry or every incremental 100

00:02:38.290 --> 00:02:40.870
berries we're going after,
but the numbers aren't as easy

00:02:40.870 --> 00:02:42.244
right over here--
you'll actually

00:02:42.244 --> 00:02:44.070
see something going
the other way.

00:02:44.070 --> 00:02:46.850
But the question, an interesting
question is, OK, Sal.

00:02:46.850 --> 00:02:49.530
You set up the numbers like
this earlier two videos ago.

00:02:49.530 --> 00:02:51.220
But why would this make sense?

00:02:51.220 --> 00:02:53.780
Why is this idea of
increasing opportunity

00:02:53.780 --> 00:02:56.840
cost showing up in a lot
of different economic,

00:02:56.840 --> 00:02:58.860
and you can call this
an economic model.

00:02:58.860 --> 00:03:02.420
We have simplified our economic
reality, the choices that we

00:03:02.420 --> 00:03:04.410
have to make, down
to two variables

00:03:04.410 --> 00:03:06.380
the number of rabbits
we have to go after

00:03:06.380 --> 00:03:07.580
or the number of berries.

00:03:07.580 --> 00:03:10.030
But why does this show
up in economic models?

00:03:10.030 --> 00:03:12.910
And just to be clear, it does
not show up in all of them.

00:03:12.910 --> 00:03:15.420
But to think about our
example, as a hunter gatherer,

00:03:15.420 --> 00:03:19.550
we started here in
Scenario F. In Scenario F,

00:03:19.550 --> 00:03:23.870
we've decided to not
pursue any rabbits.

00:03:23.870 --> 00:03:27.280
Even the slower,
not so quick witted

00:03:27.280 --> 00:03:31.560
rabbit who maybe likes to hang
out with you, next to you,

00:03:31.560 --> 00:03:35.480
and it likes to play with your
spears or your bow and arrow--

00:03:35.480 --> 00:03:37.660
you are not even going
after that rabbit.

00:03:37.660 --> 00:03:40.050
Instead you are choosing
to spend all of your time

00:03:40.050 --> 00:03:41.294
on the berries.

00:03:41.294 --> 00:03:42.960
And not only are you
getting, literally,

00:03:42.960 --> 00:03:45.170
the low hanging fruit,
the easy berries,

00:03:45.170 --> 00:03:47.352
you're getting the
berries that are further

00:03:47.352 --> 00:03:49.810
up the bush, the berries that
you have to get cut by thorns

00:03:49.810 --> 00:03:52.470
to get, the berries that you
have to climb trees to get.

00:03:52.470 --> 00:03:54.470
So you're getting even
hard to get berries

00:03:54.470 --> 00:03:57.900
and you're not going after
even easy to get rabbits.

00:03:57.900 --> 00:03:59.400
But now all of a
sudden if you say,

00:03:59.400 --> 00:04:01.858
well, you know, that rabbit
who's been hanging out with me,

00:04:01.858 --> 00:04:03.690
he's been kind of asking for it.

00:04:03.690 --> 00:04:05.280
And so that was
very easy to get.

00:04:05.280 --> 00:04:07.840
It didn't take much
time on a given day

00:04:07.840 --> 00:04:10.870
to get those really easy rabbits
who like to hang out with you.

00:04:10.870 --> 00:04:15.770
You're not give a lot
in terms of berries.

00:04:15.770 --> 00:04:18.350
One, it didn't take you much
time to get those, literally,

00:04:18.350 --> 00:04:21.832
those slow and maybe less
quick witted rabbits.

00:04:21.832 --> 00:04:23.540
And you're giving up,
in that same amount

00:04:23.540 --> 00:04:26.540
of time, the very
hard to get berries.

00:04:26.540 --> 00:04:28.970
So you're only going to
give up about 20 of them.

00:04:28.970 --> 00:04:32.030
Now if you want to
2 rabbits a day,

00:04:32.030 --> 00:04:34.810
not only are you going to get
the slowest of the rabbits,

00:04:34.810 --> 00:04:36.393
the ones that aren't
afraid of humans,

00:04:36.393 --> 00:04:38.900
now you're going to have go get
the slightly faster rabbit--

00:04:38.900 --> 00:04:43.060
the slightly faster rabbit, who
wants to die a little bit less

00:04:43.060 --> 00:04:44.870
and is maybe a
little bit sharper.

00:04:44.870 --> 00:04:47.430
And you're now not
giving up the berries

00:04:47.430 --> 00:04:50.047
that are way up in the tree and
that are protected by thorns.

00:04:50.047 --> 00:04:52.380
You're giving up berries that
are closer down the trees.

00:04:52.380 --> 00:04:54.296
So this is going to take
you a little bit more

00:04:54.296 --> 00:04:55.930
time to do than this
right over here.

00:04:55.930 --> 00:04:57.596
And in that little
bit more time, you're

00:04:57.596 --> 00:05:00.392
also giving up berries
that were easier to get.

00:05:00.392 --> 00:05:02.600
And so this phenomenon is
going to happen all the way

00:05:02.600 --> 00:05:05.390
until in this scenario we're
trying to get 5 rabbits a day.

00:05:05.390 --> 00:05:08.260
You are literally going after
the quickest and the smartest

00:05:08.260 --> 00:05:08.960
rabbits.

00:05:08.960 --> 00:05:11.400
But you insist on going for
them and in your pursuit

00:05:11.400 --> 00:05:14.807
of these quick, fast rabbits
you're even ignoring berries.

00:05:14.807 --> 00:05:16.640
You're literally, like,
stepping on berries.

00:05:16.640 --> 00:05:18.973
You're not eating the berries
that are right next to you

00:05:18.973 --> 00:05:21.892
because you're so obsessed
with eating rabbits.

00:05:21.892 --> 00:05:23.350
So hopefully that
gives you a sense

00:05:23.350 --> 00:05:26.360
of why increasing opportunity
cost does show up.

00:05:26.360 --> 00:05:29.500
And when you graphically show
it in terms of a production

00:05:29.500 --> 00:05:33.450
possibilities frontier, it shows
up in this bow-shaped curve.

00:05:33.450 --> 00:05:36.140
And you can see it, because
as we go from this point

00:05:36.140 --> 00:05:40.630
to this point, you see
that as we increase one

00:05:40.630 --> 00:05:44.380
the slope, the negative
slope, is increasing.

00:05:44.380 --> 00:05:46.380
Or another way to think
about, in Scenario F,

00:05:46.380 --> 00:05:48.247
the slope is roughly like this.

00:05:48.247 --> 00:05:50.330
And I encourage you to
review the algebra playlist

00:05:50.330 --> 00:05:54.180
if the idea of slope
is confusing to you.

00:05:54.180 --> 00:05:56.984
But at F, the
slope is like that.

00:05:56.984 --> 00:05:59.400
I'm drawing the slope of the
tangent line right over here.

00:05:59.400 --> 00:06:01.070
At E it gets even steeper.

00:06:01.070 --> 00:06:07.040
You're giving up even more of
the berries per unit rabbit.

00:06:07.040 --> 00:06:08.751
And now in D you're
giving up even more.

00:06:08.751 --> 00:06:10.250
And then you're
giving up even more.

00:06:10.250 --> 00:06:13.030
And so whenever you
see a bow-shaped curve

00:06:13.030 --> 00:06:15.820
like this, so a curve that
literally looks like this,

00:06:15.820 --> 00:06:18.630
this shows that you have
increasing opportunity costs.

00:06:18.630 --> 00:06:20.651
As you increase
more and more units,

00:06:20.651 --> 00:06:22.150
you're going to
have to give up more

00:06:22.150 --> 00:06:24.672
and more of the alternative.


Opportunity Cost

WEBVTT
Kind: captions
Language: en

00:00:00.540 --> 00:00:03.150
Let's say we've been
hanging out in scenario E

00:00:03.150 --> 00:00:04.170
for a bunch of days.

00:00:04.170 --> 00:00:06.410
On average, we've been
catching one rabbit,

00:00:06.410 --> 00:00:08.350
but gathering 280 berries.

00:00:08.350 --> 00:00:10.330
We were in, I
guess, a berry mood.

00:00:10.330 --> 00:00:12.750
So this is scenario
E right over here.

00:00:12.750 --> 00:00:15.260
But now all of a sudden, we're
in the mood for more protein.

00:00:15.260 --> 00:00:20.620
So let me write down,
we are in scenario E.

00:00:20.620 --> 00:00:23.052
And we're in the mood
for more protein.

00:00:23.052 --> 00:00:25.510
And so we want to think about
what are the trade-offs if we

00:00:25.510 --> 00:00:27.420
try to catch more rabbits?

00:00:27.420 --> 00:00:29.450
So what I want to
do-- I want to say,

00:00:29.450 --> 00:00:35.490
if I want to catch
1 more rabbit,

00:00:35.490 --> 00:00:37.330
what am I going to
have to give up?

00:00:37.330 --> 00:00:39.700
So if I catch one
more rabbit-- so

00:00:39.700 --> 00:00:42.530
I go from 1 rabbit on
average to 2 rabbits a day.

00:00:42.530 --> 00:00:44.060
So I'm really going
from scenario E

00:00:44.060 --> 00:00:46.550
to scenario D. What
am I going to give up?

00:00:46.550 --> 00:00:48.500
So this is plus 1 over here.

00:00:48.500 --> 00:00:52.450
Well, I'm going to
give up 40 berries.

00:00:52.450 --> 00:00:54.100
And you can see it
visually right here.

00:00:54.100 --> 00:00:56.840
If I try to get 1
more rabbit, I can't

00:00:56.840 --> 00:00:59.560
go into this impossible,
this unattainable part

00:00:59.560 --> 00:01:00.250
right over here.

00:01:00.250 --> 00:01:03.350
I have to stay on the production
possibilities frontier,

00:01:03.350 --> 00:01:07.860
sometimes abbreviated as PPF.

00:01:07.860 --> 00:01:11.200
Or I guess the acronym for
it, I should say, is PPF.

00:01:11.200 --> 00:01:15.490
But if I want 1 more rabbit,
the production possibilities

00:01:15.490 --> 00:01:19.980
frontier drops off, and I
will have to give up 40 fruit.

00:01:19.980 --> 00:01:23.490
So 1 more rabbit means
that I have a cost.

00:01:23.490 --> 00:01:30.390
So I have to give up,
on average, 40 berries.

00:01:30.390 --> 00:01:33.160
And the technical term for
what I've just described

00:01:33.160 --> 00:01:36.880
is the opportunity cost
of going after 1 more

00:01:36.880 --> 00:01:39.530
rabbit is giving up 40 berries.

00:01:39.530 --> 00:01:40.660
So let me write this down.

00:01:40.660 --> 00:01:51.910
The opportunity cost of
1 more rabbit-- and this

00:01:51.910 --> 00:01:55.110
is particular to
scenario E. As we'll see,

00:01:55.110 --> 00:01:58.160
it's going to change depending
on what scenario we are in,

00:01:58.160 --> 00:01:59.730
at least for this example.

00:01:59.730 --> 00:02:01.820
So the opportunity
cost of 1 more rabbit

00:02:01.820 --> 00:02:09.350
is 40 berries, assuming
we are in scenario E. 1

00:02:09.350 --> 00:02:12.730
more rabbit, I have
to give up 40 berries.

00:02:12.730 --> 00:02:14.970
And another term when we
talk about the opportunity

00:02:14.970 --> 00:02:18.250
cost of going after--
after producing I

00:02:18.250 --> 00:02:20.520
guess you could say-- the
operating cost of producing

00:02:20.520 --> 00:02:22.770
1 more rabbit here, when we
talk about the opportunity

00:02:22.770 --> 00:02:24.920
cost of producing 1 more
unit, that's sometimes

00:02:24.920 --> 00:02:26.830
called the marginal cost.

00:02:26.830 --> 00:02:28.900
So this right over
here, you can also

00:02:28.900 --> 00:02:30.530
view it as the marginal cost.

00:02:33.530 --> 00:02:35.480
In the context of
this video, our costs

00:02:35.480 --> 00:02:38.020
are in terms of the
thing that I'm giving up,

00:02:38.020 --> 00:02:40.080
the opportunity
that I'm giving up.

00:02:40.080 --> 00:02:43.300
In other scenarios, you'll
see sometimes a marginal cost

00:02:43.300 --> 00:02:46.330
be given in actual monetary
units, like dollars or whatever

00:02:46.330 --> 00:02:46.830
else.

00:02:46.830 --> 00:02:49.290
What was the cost of
producing that extra unit,

00:02:49.290 --> 00:02:51.680
that extra widget,
right over there.

00:02:51.680 --> 00:02:54.269
But let's make sure we
understand opportunity cost.

00:02:54.269 --> 00:02:56.810
So that's when we were sitting
in scenario E, the opportunity

00:02:56.810 --> 00:02:58.810
cost of 1 more rabbit.

00:02:58.810 --> 00:03:02.100
But what's the opportunity
cost-- let's say,

00:03:02.100 --> 00:03:03.350
we're tired of eating meat.

00:03:03.350 --> 00:03:04.808
We're sitting in
scenario E, and we

00:03:04.808 --> 00:03:06.760
want to become
vegetarians altogether.

00:03:06.760 --> 00:03:12.210
So we want to go to scenario F--
essentially not eat any rabbits

00:03:12.210 --> 00:03:14.430
and eat as much
fruit as possible.

00:03:14.430 --> 00:03:17.100
So another thing you
could ask in scenario E

00:03:17.100 --> 00:03:24.457
is the opportunity
cost of-- and just

00:03:24.457 --> 00:03:26.040
to make the numbers
easier-- I'm going

00:03:26.040 --> 00:03:32.970
to say opportunity
cost of 20 more berries

00:03:32.970 --> 00:03:37.820
is, well, I'm going
to give up a rabbit.

00:03:37.820 --> 00:03:40.790
So over here, what we're
doing is we're saying,

00:03:40.790 --> 00:03:42.940
OK, I want to increase
my berries by 20,

00:03:42.940 --> 00:03:46.220
but to do that, I have to
decrease my rabbits by 1.

00:03:46.220 --> 00:03:48.270
So the opportunity
cost-- assuming we

00:03:48.270 --> 00:03:51.650
are in scenario E-- the
opportunity cost of 20 more

00:03:51.650 --> 00:03:56.940
berries is 1 rabbit.

00:03:56.940 --> 00:03:59.490
Now this right over here
is not a marginal cost,

00:03:59.490 --> 00:04:02.420
because I'm talking about the
cost of 20 more units, not just

00:04:02.420 --> 00:04:03.450
1.

00:04:03.450 --> 00:04:07.450
If I want to write this as a
marginal cost of 1 more berry,

00:04:07.450 --> 00:04:11.530
then I could just say, well
if 20 berries is 1 rabbit,

00:04:11.530 --> 00:04:13.890
you could essentially
divide both sides by 20.

00:04:13.890 --> 00:04:19.950
So 1 more berry-- and I'll
assume, for those of you who

00:04:19.950 --> 00:04:22.200
want to get technical, that
it's somewhat linear right

00:04:22.200 --> 00:04:25.910
over here-- 1 more berry if
we divide both sides by 20

00:04:25.910 --> 00:04:32.500
is 1/20 of a rabbit.

00:04:32.500 --> 00:04:36.000
So if I go for one extra
berry sitting in scenario E,

00:04:36.000 --> 00:04:40.690
on average I'm going to
get 1/20 less of a berry.

00:04:40.690 --> 00:04:42.730
And when I phrase
it this way, it

00:04:42.730 --> 00:04:51.217
is being phrased
as a marginal cost.

00:04:51.217 --> 00:04:53.550
Now for those of you who want
to get a little technical,

00:04:53.550 --> 00:04:55.510
this is a curve right over here.

00:04:55.510 --> 00:04:57.910
So it might not be exactly this.

00:04:57.910 --> 00:05:00.420
Well, I don't want to get
too technical for the sake

00:05:00.420 --> 00:05:02.200
of this one right
over here, this

00:05:02.200 --> 00:05:03.810
is a safe way to think about it.

00:05:03.810 --> 00:05:06.706
The opportunity cost of 20
more berries is 1 rabbit,

00:05:06.706 --> 00:05:08.330
but if you assume
that this is somewhat

00:05:08.330 --> 00:05:10.680
linear right over here--
it's not so curved,

00:05:10.680 --> 00:05:13.070
it's somewhat of a line
between those 2 points--

00:05:13.070 --> 00:05:17.070
then the opportunity cost of
1 berry is 1/20 of a rabbit.

00:05:17.070 --> 00:05:21.396
Or the marginal cost of an
extra berry is 1/20 of a rabbit.

00:05:21.396 --> 00:05:23.520
And we can do it at different
points of this curve,

00:05:23.520 --> 00:05:25.010
and I actually
encourage you to do.

00:05:25.010 --> 00:05:27.190
Based on the data that we
have in this table that we

00:05:27.190 --> 00:05:29.580
constructed in the last
video and maybe this curve,

00:05:29.580 --> 00:05:31.530
think about what
the opportunity cost

00:05:31.530 --> 00:05:33.840
is in the different scenarios.

00:05:33.840 --> 00:05:36.730
If you're in scenario B and
if you want an extra rabbit,

00:05:36.730 --> 00:05:41.620
how much is that going to
cost you in terms of berries?

00:05:41.620 --> 00:05:44.720
Or if you want more
berries, what's

00:05:44.720 --> 00:05:48.070
that going to cost you
in terms of rabbits?