Opportunity cost Flashcards
Topic 1: Scarcity and Choice
What is opportunity cost?
The cost of the next best alternative forgone when making a decision.
What causes opportunity cost?
scarcity.
What is meant by a ‘Tradeoff’?
when one thing is lost to gain something else.
What do PPC’s show?
- the maximum productive potential of an economy when all resources are efficient and fully employed.
- the opportunity cost of using scarce resources.
What does it mean if a point lies on the PPC?
It means that it is productively efficient because all resources are being used to their full potential.
What is the law of diminishing returns?
That the opportunity cost of producing one more unit of good A increases as production increases in terms of good B.
What does an outward shift in the PPC show?
It shows an increase in the productive capacity of the economy - Long run economic growth.
What is short run economic growth?
An increase in output of the economy (an increase in GDP).
What is long run economic growth?
An increase in the quality or quantity of factors production which leads to an increase the productive capacity of the economy.
What assumptions are made to draw the PPC?
- a fixed amount of resources are used.
- there is a constant state of technology.
What are capital goods?
Goods which can be used to produce other goods e.g. machinery.
What are consumer goods?
Goods which cannot be used to produce other goods e.g.clothing.
What are the issues with the concept of opportunity cost?
- some alternatives are difficult to quantify e.g. the benefit of travelling vs work experience.
- opportunity cost is based on future events which can be difficult to place a monetary value on.
- many firms operate using predetermined targets which overlook opportunity cost.
- often overlooked as opportunity cost always exists.
