1.3 Opportunity Cost

Question 1

What is opportunity cost ?

Answer 1

opportunity cost is the next best alternative forgone when making an economic decision is made

Question 2

What is a production possibility curve?

Answer 2

A production possibility curve (PPC) who’s the maximum output combination of 2 goods or services that can be produced when fully utilising current resources and technology, in a given period of time

Question 3

What do different points on the PPC mean ?

Answer 3

• points on the PPC are described as productively efficient, since the economy is making full use of current resources and technology
• points below the PPC are described as inefficient as they represent output combinations below possible output
• points outside of the PPC are described as unattainable with current resources and technology.

Question 4

How is opportunity cost represented on the PPC ?

Answer 4

Question 5

What happens on the PPC when more of 1 good or service is produced ?

Answer 5

• as more of 1 product is produced the opportunity cost of producing extra units increases: when the PPC is curved
• if the opportunity cost is constant the PPC will be drawn as a downward sloping line

Question 6

What is allocative efficiency ?

Answer 6

For an economy to achieve allocative efficiency, resources must be allocated to producing the combination of products that maximise total social welfare, producing what leads to the greatest excess of total social benefit above total social costs

Question 7

How does the PPC shift ?

Answer 7