1.3 Opportunity cost

Question 1

What is an opportunity cost?

Answer 1

Value of the next best alternative forgone.

Question 2

What is a trade off?

Answer 2

When one thing is lost to gain something else.

Question 3

What does a production possibility curve (PPC) show?

Answer 3

-Maximum productive potential of an economy, using a combination of two goods/services, when resources are fully/ efficiently employed.
- Can also show the opportunity cost.

Question 4

Draw a PPC and explain what points A-D represent.

Answer 4

• Points A and B are the most productively efficient: resources are being used to their full productive potential.
  -Points C and D are inefficient: resources are not being used to their full productive potential.
  -Producing at E is not yet attainable with current resources.

Question 5

Draw a PPC diagram with output of yoghurt/cheese and calculate the opportunity cost.

Answer 5

Producing 100 units of cheese means that only 40 units of yoghurt can be produced instead of the potential of 90. Therefore, the opportunity cost is 90 - 40 = 50 units of yoghurt.

Question 6

Draw and describe a PPC using showing economic growth and decline

Answer 6

-Economic growth can be shown by an outward shift in the PPF, from the curve with point A on it, to the curve with point B on it. A decline in the economy would be depicted by an inward shift.

Question 7

What shifts the PPF outwards?

Answer 7

-Increase in the quantity or quality of resources > productive potential of economy increases > economic growth. Can be achieved with use of supply side policies.

Question 8

Explain moving along the PPC.

Answer 8

Moving along the PPC uses the same number and state of resources.