What Is Opportunity Cost? — Transcript

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1. 0:00♪ [music] ♪
2. 0:13- [Narrator] What is opportunity cost?
3. 0:15Opportunity cost refers to the value
4. 0:17a person could have received
5. 0:19but passed up in pursuit of another option.
6. 0:22So if you were to wait in line for free ice cream,
7. 0:26you actually give up the opportunity
8. 0:28to do something else with your time,
9. 0:30like working at a job or reading a book.
10. 0:32So that ice cream really isn't free.
11. 0:35Economists even use the concept of opportunity cost
12. 0:38to determine if people can benefit
13. 0:40from trading with one another.
14. 0:41Let's look at a simple example --
15. 0:43just two people, Bob and Ann, who produce just two goods,
16. 0:47bananas and fish.
17. 0:49Because of the concept of opportunity costs,
18. 0:52Ann and Bob are worse off
19. 0:54when they try to do everything themselves.
20. 0:56Here's what Bob can do
21. 0:57if he spends all of his time producing only one good.
22. 1:01Bob can either gather 10 bananas,
23. 1:03or he can catch 10 fish.
24. 1:06And Ann can either gather 10 bananas
25. 1:09or catch 30 fish.
26. 1:11Bob has to choose to gather bananas or catch fish.
27. 1:14When he chooses to gather 1 banana,
28. 1:16he gives up 1 fish.
29. 1:18In essence, Bob trades with himself.
30. 1:21He can use that time to gather bananas
31. 1:22or trade that time to catch fish,
32. 1:25and the cost of that trade is 1 fish per banana.
33. 1:29That's Bob's opportunity cost.
34. 1:32The same holds true for Ann,
35. 1:34but her cost of producing 1 banana is 3 fish.
36. 1:37In the amount of time that it takes Ann
37. 1:39to gather 1 banana,
38. 1:41she could have caught 3 fish.
39. 1:43She trades with herself 1 banana for 3 fish.
40. 1:47So Bob only has to give up 1 fish to produce 1 banana,
41. 1:51but Ann must give up 3 fish to produce 1 banana.
42. 1:55Ann's opportunity cost of gathering a banana
43. 1:58is higher than Bob's.
44. 2:00If Ann and Bob are allowed to trade with one another,
45. 2:03they may be able to gain from specialization
46. 2:06if Ann focuses on catching fish,
47. 2:08and Bob focuses on gathering bananas.
48. 2:11Because our time is valuable,
49. 2:13any decision we make has a cost.
50. 2:15If we focus our time on tasks we're good at,
51. 2:17like Ann and Bob,
52. 2:18then we end up in a better position
53. 2:20than if we try to do everything ourselves.
54. 2:24♪ [music] ♪
55. 2:25To learn more about the role of specialization in trade,
56. 2:28click here.
57. 2:29Or, to test your knowledge on opportunity cost, click here.
58. 2:33♪ [music] ♪
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61. 2:41♪ [music] ♪