1.3 - Opportunity cost

Question 1

What gives rise to opportunity cost?

Answer 1

The scarcity of resources.

Question 2

What is opportunity cost?

Answer 2

The value of the next best alternative forgone.

Question 3

What is a ‘trade off’?

Answer 3

When one thing is lost to gain something else.

Question 4

When can opportunity cost be useful to economic agents? (Examples)

Answer 4

For example, producers might have to choose between hiring
extra staff and investing in a new machine. 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.

Question 5

What does PPF stand for?

Answer 5

Production possibility frontier.

Question 6

What is a PPF?

Answer 6

They depict the maximum productive potential of
an economy, using a combination of two goods or services, when resources are fully
and efficiently employed.

Question 7

What can PPF’s show?

Answer 7

The opportunity cost of using the scarce resources.

Question 8

Where are the points with the greatest efficiency on a PPF/PPC?

Answer 8

On the curve itself.

Question 9

What are points on a PPF curve itself?

Answer 9

The most productively efficient points on the diagram.

Question 10

What does a movement ALONG a PPF depict?

Answer 10

A shift in allocation of resources, but still at the maximum possible productive efficiency.

Question 11

What does a point inside the PPF curve mean?

Answer 11

The resources are not being used efficiently, the resources are not used to their full productive potential.

Question 12

What does the Law of Diminishing returns state? (LODR for PPF)

Answer 12

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.

Question 13

What does PPF assume?

Answer 13

A fixed amount of resources are used and there is a constant state of technology.

Question 14

What causes a shift in a PPF?

Answer 14

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.

Question 15

What are capital goods?

Answer 15

Goods which can be used to create other goods - such as machinery.

Question 16

What are consumer goods?

Answer 16

Goods which cannot be used to produce other goods, and are themselves consumed - such as clothing.