An opportunity cost will usually arise whenever an economic agent chooses between alternative ways of allocating scarce resources. The opportunity cost of such a decision is the value of the next best alternative use of scarce resources. Opportunity cost can be illustrated by using production possibility frontiers (PPFs) which provide a simple, yet powerful tool to illustrate the effects of making an economic choice.

A PPF shows all the possible combinations of two goods, or two options available at one point in time.

Productionpossibilities

Mythica, which is a hypothetical economy, produces only two goods – textbooks and computers. When it uses all of its resources, it can produce five million computers and fifty five million textbooks. In fact, it can produce all the following combinations of computers and books.

These combinations can also be shown graphically, the result being a production possibility frontier.