1) scarcity and choice Flashcards
Define opportunity cost
Next best opportunity foregone
Define PPC
Price possibility curve- shows the maximum combination of 2 goods that can be produced with fixed inputs in a given period of time
How do you expand a PPC
Increase the quality and availability of factors of production
What latin expression is assumed for opportunity cost/ PPCs
Ceteris Parabus- fixed levels of input, time, technology and productivity of workers
How is a negative output gap shown on a PPC
Any point on the diagram where the level of production of the two goods is not on the maximum production curve
Define scarcity
Scarcity arises because economic agents have unlimited wants and finite resources
How is opportunity cost worked out on a PPC
The value/quantity of one good given up for the value/quantity of one good gained
What is productive efficiency and how is it shown on a PPC
When a firm produces at a minimum average cost, choosing the correct combination of inputs and producing the maximum total of outputs
-all points along the PPC are productively efficient because the greatest return of outputs is being yielded from the inputs
Why can a PPC be productively efficient but not allocatively efficient
Anywhere on the PPC curve is productively efficient because it is maximising output. it might not be allocatively efficient because society might not demand the current levels of the two goods ie want an increased amount of x rather than y
What can cause a PPC to shift out
Improved quantity or quality of factors of productive (land labour capital enterprise)
What can cause a PPC to shift inwards
- natural disaster / weather
- Decrease in quality or quantity of land labour capital or enterprise
Evaluation of PPC curves, benefits and problems
Benefits- by considering the opportunity cost and demands of society firms can become more allocatively efficient
problems- May be a lack of consumer demand information
- opportunity cost might be unknown
- changing factors of production may be difficult to shift PPC outwards if there are no good substitutes
