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Unit 1, Lesson 2: Opportunity Costs and Trade-Offs

This lesson on opportunity cost will be on the Basic Economic Concepts portion of the AP examination(s).

Trade-offs are something which we have all experienced before. When you make a choice between two options, you experience a trade-off.



For example, if someone offered you either an apple or a banana, you must make a trade-off; a choice in which you gain one thing while losing the option to gain the other.

So let's say you choose the banana. In this case, your opportunity cost was the apple. In essence, your opportunity cost is the next best alternative when you make a decision involving a trade-off.

The application of this concept is extremely important in economics, because it allows companies and even entire countries to make decisions involving production.

However, the situations aren't as simple as deciding between an apple or a banana. Instead, they are more complex and involve tables and graphs.

In this lesson, we will be using tables to explore opportunity cost, while we will use a special graph known as the production possibilities curve for the next one.

For the purpose of this example, let's say a business known as Super Snacks can either produce tacos or burritos when using all of their resources.


With the table given above, we can calculate the opportunity cost for the business when it decides to produce either tacos or burritos.

When the company moves from a combination of 10 burritos/0 tacos to 8 burritos/1 taco, they are losing 2 burritos for every taco.

Thus, the opportunity cost when moving from 0 tacos to 1 taco is 2 burritos.

Let's go backwards to find the opportunity cost for making tacos. When moving from producing 8 burritos to 10 burritos, the company loses out on making 1 taco.

For mathematics aficionados, the opportunity cost of making one product over the other can simply be thought of as slope.

In future lessons, we will graph tables like the one above and define scenarios in economics.

 Key Terms
Trade-off - A decision in which a party gains one thing while losing the opportunity to gain the other.

Opportunity Cost - The next best alternative to the choice made in a trade-off.


Review Question(s)
2. If choosing between a cell phone or a laptop computer, what is the opportunity cost of choosing the computer?
     a) The cell phone
     b) The laptop computer
     c) The price of the computer

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