choice, opportunity cost, & scarcity

Question 1

what are the 4 types of factors of production (FOPs)?

Answer 1

1. capital
2. entrepreneurship
3. land
4. labour

Question 2

why does the problem of scarcity arise?

Answer 2

• because all economic agents have unlimited wants, but there are limited resources available to satisfy those wants

Question 3

what does the problem of scarcity imply?

Answer 3

• it implies that there is a need for choices to be made

Question 4

how does choosing what to do with our limited resources relate to opportunity cost?

Answer 4

• because of scarcity, choices need to be made about the scarce resources available
• as making choices always incurs a cost, this cost refers to the opportunity cost of a choice

Question 5

what is the definition of opportunity cost?

Answer 5

• opportunity cost is defined as the value of the next best alternative forgone

Question 6

what diagram do we use to illustrate scarcity and opportunity cost?

Answer 6

• a production possibilities curve (PPC)

Question 7

what are the things to note when drawing a PPC?

Answer 7

• the label on the x-axis & the y-axis are a type of good!
• for e.g., the x-axis is usually capital goods, while the y-axis is consumer goods

Question 8

how do i interpret the PPC?

Answer 8

• when comparing 2 points on the PPC,

Question 9

what does it mean when an economy is operating inside their PPC?

Answer 9

• it means that there is an inefficient allocation of resources in the economy

Question 10

what does it mean when an economy is operating on its PPC?

Answer 10

• it means that the economy has achieved productive efficiency,
• as all resources are fully & efficiently utilised

Question 11

can an economy operate outside their PPC?

Answer 11

• NO!!
• points outside the PPC are unattainable, as an economy cannot produce that particular combination of goods,
• given their scare resources

Question 12

what is the reason behind increasing opportunity cost?

Answer 12

• not all resources are homogenous, as,
• not FOPs are equally suited to produce all goods

Question 13

explain why a baker will face increasing opportunity costs when he chooses to produce more cakes. [3]

Answer 13

• opportunity cost is defined as the value of the next best alternative forgone
• when a baker decides to produce more cakes, it will begin with using resources that are most suitable, such as eggs, sugar and butter
• however, when these resources run out, the backer will be forced to use resources that are less suitable, such as brown sugar instead of granulated sugar, resulting in a lower productivity
• hence, in order to produce the same additional amount of cakes, the baker will have to use more resources, as it is using less suitable resources
• this implies that increasingly more cookies have to be sacrified for each additional unit of cakes produced, resulting in increasing opportunity cost

Question 14

what else can the PPC do apart from showing us the trade-off between producing different goods in an economy?

Answer 14

• it can show us the trade-off between current consumption & future consumption

Question 15

what are the labels on a PPC that ilustrates the trade-off between current consumption & future consumption?

Answer 15

• consumption goods on the y-axis
• capital goods on the x-axis

Question 16

what does consumption goods refer to?

Answer 16

• it refers to goods that households gain satisfaction from when they consume these goods

Question 17

what does capital goods refer to?

Answer 17

• it refers to goods that are produced in order to produce other goods
• e.gs: machines & tools