1.3 - Opportunity cost Flashcards
What gives rise to opportunity cost?
The scarcity of resources.
What is opportunity cost?
The cost of the next best alternative forgone (given up when a decision is made)
What is a ‘trade off’?
When one thing is lost to gain something else - “A sacrifice that is made in order to gain something”
When can opportunity cost be useful to economic agents? (Examples)
For example….
producers might have to choose between hiring extra staff and investing in a new machine.
Consumers deciding on whether to purchase a new car or a luxury holiday
The government might have to choose between spending more on the NHS and spending more on education. They cannot
do both because of finite resources, so a choice has to be made for where resources
are best spent.
What does PPF stand for?
Production possibility frontier.
What is a PPF?
They depict the maximum productive potential of an economy, using a combination of two goods or services, when resources are fully
and efficiently employed.
What can PPF’s show?
The opportunity cost of a decision
If a Firm wants to increase production of Good A then the increase shown by the movement from A1 to A2 has an opportunity cost of a decrease in Good B shown by the movement from B1 to B2
SEE PPC Curve graph
Where are the points with the greatest efficiency on a PPF/PPC?
On the curve itself.
What are points on a PPF curve itself?
The most productively efficient points on the diagram.
What does a movement ALONG a PPF depict?
A shift in allocation of resources, but still at the maximum possible productive efficiency.
What does a point inside the PPF curve mean?
The resources are not being used efficiently, the resources are not used to their full productive potential.
What does the Law of Diminishing returns state? (LODR for PPF)
The opportunity cost of producing more of good X increases, in terms of the lost units of good Y that could have been produced, as the production of X increases.
What does PPF assume?
A fixed amount of resources are used and there is a constant state of technology.
What causes a shift in a PPF?
There is an increase in the quantity or quality of resources, so that the productive potential of the economy increases, and there is economic growth. This can be achieved with the use of supply side policies.
Increase in labour force
Resources increase or decrease depending on the shift
Improvement of technology
What are capital goods?
Goods which can be used to create other goods - such as machinery.
