Opportunity Cost and PPF Flashcards
Define relative scarcity
Unlimited wants, limited resources.
How does relative scarcity force individuals and societies to make choices?
This forces individuals, businesses, and governments to make choices about how to allocate resources efficiently.
What does it mean to make a trade-off when making economic decisions?
A trade-off occurs when choosing one option means giving up another.
Every decision has a cost because resources used for one purpose cannot be used elsewhere.
What is opportunity cost?
Opportunity cost is the next best alternative forgone, which may not always be measured in money.
What is the financial cost of a decision?
Financial cost refers to the monetary price of a decision.
How do economists determine the optimal allocation of resources?
Economists compare the benefits of using resources against the cost. We should keep allocating resources until we maximise next benefits.
Define total benefit
The total value or satisfaction gained from using resources.
Define total cost
The total expense or sacrifice involved in resource use
Define net benefits
The difference between total benefit and total cost.
What is the economic rule for when to continue allocating resources?
Continue allocating resources as long as Marginal Benefit exceeds Marginal Cost.
What happens if Marginal Benefit < Marginal Cost? Use an example.
It means allocating more resources is inefficient.
Example: If the cost of building an extra hospital is $50 million, but the benefit is only $40 million, it would be inefficient to build the hospital.
What are the three assumptions when constructing a PPF?
- Resources are fixed.
- Technology is fixed.
- The economy only produces two goods.
What does a PPF illustrate?
- Scarcity
- Trade-offs
- Opportunity cost
Why is this PPF a straight line instead of curved?
The opportunity cost is constant, meaning resources are equally efficient at producing both goods.
Why is the normal shape of the PPF bowed outward instead of straight?
Resources are not equally efficient at producing all goods.
As more of one good is produced, less suitable resources are used, increasing opportunity cost.
Explain the law of increasing opportunity cost in your own words.
As production shifts from one good to another, more resources are needed, leading to a higher opportunity cost.
What does it mean if a point is on the PPF curve?
The economy is using all available resources efficiently
What does it mean if a point is inside the PPF curve?
The economy is underutilising resources - unemployment
What does it mean if a point is outside the PPF curve?
The economy cannot produce at this point with current resources
Why does allocating more resources to capital goods lead to greater economic growth?
Capital goods (e.g., factories, technology) increase future production capacity, shifting the PPF outward.
How can the PPF shift outward? Provide two real-world examples.
Improved education/training (increases workforce productivity).
Technological advancements (improves production efficiency).
What does it mean if only one section of the PPF shifts? Give an example.
If only one industry improves, only that part of the PPF will expand.
Example: A breakthrough in solar panel technology increases energy production without affecting other industries.
Explain how opportunity cost, marginal analysis, and the PPF are connected in economic decision-making.
Opportunity cost connects both the concept of MA and the PPF is how the decision is made.
OC helps individuals/governments decide between alternatives.
MA ensure resources are allocated efficiently.
PPF illustrates trade-offs, efficiency, and economic growth.
Define microeconomics
Microeconomics deals with the economic problem from an individual or ‘micro’ point of view. Microeconomics attempts to understand how consumers and producers make decisions.
What does microeconomics study?
Microeconomics studies how markets and prices work to allocate resources between all the competing industries in the economy.
Define Macroeconomics
Macroeconomics deals with the economic problem from society’s point of view. Macroeconomics is concerned with the performance of the whole economy.
What does macroeconomics focus on?
Macroeconomics focuses on total economic activity, including total production, total employment, and the overall price level.
What is marginal analysis?
Compares the marginal benefits from an activity to the marginal costs. It’s used to make rational decisions about resource use.
What is the principle of decreasing marginal benefit?
As you consume more of something the extra or additional benefit you get declines.
Based on the principles of decreasing marginal benefit, how should we allocate resources?
We should allocate resources to ensure that net benefits are maximised. Because resources are scarce, they should allocated to get the best value from their use.
What is Ceteris Parabus?
To understand how the economy works, we need to identify the cause and effect of each new variable. We can then create models to build theories based on these insights.
What is the economic problem?
Unlimited wants, limited resources due to scarcity. Every choice involves a sacrifice which relates to opportunity cost which is the next best alternative forgone.
What is economics?
An enquiry into the nature and causes of the wealth.
What are the three basic economic questions?
- What to produce
- How to produce?
- For whom to produce?
What are the types of resources?
- Natural resources - soil, water, minerals.
- Human resources - labour (workers), enterprise
- Capital resources - Machinery, factories, tools.
What is the economic model?
An economic model is a representation of the economic problem. Using models, it enables economists to determine cause and effect.
What is the economic decision-making process?
Economics is a decision-making science – it is particularly concerned with analysing and explaining decisions concerning production, consumption and resource use.
