Opportunity Cost Flashcards
Opportunity cost
The next best alternative forgone when a choice is made
What point represents the most efficient level of production on a PPF?
- any point on the PPF curve as using all factors of production
- no idle factors as they are all fully and efficiently employed
What are all the points on the PPF curve representing?
- producing the maximum amount of output of both goods given the current resources
- as much output as possible at the lowest cost
If a point is moved on the PPF curve, what is there?
an opportunity cost
Why is there no opportunity cost inside a PPF?
- any point inside the PPF is productively inefficient
- there are idle factors of production that can be allocated to both goods without being sacrificed, maximising both goods
- both the production of capital and consumer goods can increase
How is economic growth shown on a PPF
A shift outwards on the PPF as a result of an increase in quality and quantity of FOP
Technological biased growth
When an increase in technology produces more of one good whilst producing the same amount of the other good
- no opportunity cost as can just allocate these spare resources to the production of other goods
What happens to the PPF as a result of this?
The PPF curve shifts outwards
Free goods
A good with no opportunity cost so there is no scarcity
Economic goods
A good with an opportunity cost associated with the production and consumption of the good so there is scarcity
- therefore it is valuable and people are willing to pay
Requirement to make choices between free and economic goods
Analysis
Economic goods have scarcity and an opportunity cost attached to them
- people have to make choices to decide what they consume as they have to pay
- choices are harder due to inflation
- firms make decisions as well, based on scarcity and demand
Free goods have no scarceity and no opportunity cost so no decisions have to be made as it is free to use
Evaluation
- some goods are becoming more of an economic good
- some goods in different Industries maybe use for different purposes which require having to be paid for
- as more air pollution people want to live in clean air so are willing to pay to move out
- people may look for substitutes for sustainability
- depends on how you define the good
The problem of scarcity and the requirement to make choices
1. The short-term
- big problem of scarcity in the short run if on the PPF as all fop are fully and efficiently employed
- so if want to make more of one good have to make less of another good so there is an opportunity cost
2. Depends where on the PPF curve
- if inside the PPF firms have spare factors of production and no opportunity cost
- ideal factors of production can be allocated to maximize both goods without being sacrificial or compromised and can also make more of one good
- maximizing the production of both goods and so can meet needs and wants quicker
3. The long-term
- if quality and quantity improves over time PPF curve will shift outwards
4. Technological biased growth
- when a machine makes more of one good while making the same amount of the other good
- quality of the scarce resources increases without there being any opportunity cost
- enables maximization of both goods as can allocate resources away from one good to another
5. Renewable resources
- future generations can continue making goods
- renewable resources reduces opportunity cost and scarcity as choices do not have to be made
6. Problem of scarcity
- have unlimited needs and wants that cant be met due to limited resources and FOP
- choices have to be made to best allocate these resources with the lowest COP
