Opportunity cost test pp qs (ME 1-5) Flashcards
What is the difference between mental labour and enterprise? (7.5 marks)
- Mental labour and enterprise are both examples of resources used to satisfy needs and wants.
- They are also both examples of human resources used to satisfy needs and wants [arguably you didn’t want to spend too much time writing this bit because the question specifically asked you about differences].
- They are in fact both examples of ‘non-physical’ resources used to satisfy needs and wants.
- They differ in that mental labour is the mental effort applied in satisfying a need and want, such as the thought put in to the preparation of a lesson for students, whereas enterprise in the mental effort put in to working out what needs and wants need to be satisfied and working out how opportunities exist to use other resources to satisfy needs and wants –
- So mental labour might be using your mental faculties to design a new car, whereas enterprise is the skill and thinking going into bringing engineers together and directing their mental labour to the task, knowing that the task satisfies a need and want – or developing a new production line system to manufacture cars more efficiently.
[In a question like this asking for differences, writing about contrasting examples is often the best way of drawing out differences] - They are also both different in that the reward for mental labour is usually wages and salaries, whereas the reward for enterprise is the profit made by the business.
Describe three characteristics of a free market and explain how one of these has resulted in it becoming the predominant means of solving the economic problem.
- Main economic decisions are made by individual producers and consumers in a “free market situation” rather than by government planning.
- In making these decisions producers and consumers act in their own self interest – consumers maximise utility and producers maximise profit. By so doing resources get efficiently allocated toward the satisfaction of needs and wants.
- Freedom of enterprise prevails. Producers are not restricted in what they produce; consumers are not restricted in what they buy. The only role of the government is to create and maintain private property rights and ensure the conditions for competition (no monopolies).
- Private Ownership Resources are owned by private individuals.
- Distribution and ownership of resources determines the distribution of income. If you own more resources (or resources are more in demand) you will get more income from trading these resources and this greater income will entitle you to purchase more goods and services (the “for whom” question).
- The price mechanism in the market place determines what people would prefer and what things cost and ultimately determines the “What” and “How” questions. Follow as your teacher takes you through a basic example of this. Also look up “price mechanism” in your text and copy down the definition. Basically prices go up due to supply and demand and thereby determine production levels in an electively efficient way.
- Consumer sovereignty prevails through the price mechanism. Basically this means that “what gets made” is “what people want. Consumers have power.
- Competition between owners of resources and between producers is the prevailing state of affairs.
the second part of the question involved pointing out that this form is probably ‘the best’ system (maybe define an economic system) at ‘solving the economic problem’ in that it satisfies more needs and wants than alternatives and thus maximises satisfaction – results in a higher standard of living. You then had to justify this. Competition results in more technical efficiency/productivity. This also results in more allocative efficiency because business gets rewarded/survives based on its capacity to satisfy needs and wants, therefore needs to ensure that it is doing this. You end up with better quality, more variety and lower costs. The price mechanism and the profit motive is also a great communicator of information about what is needed and how resource allocation needs to be adjusted. The profit motive and competition also provides individual incentives to produce what is needed. An A standard answer needed to link all of this back to ‘solving the economic problem’.
State whether you agree with the following statement and justify your answer.
‘While it is true that the basic economic problem is experienced in most places, wealthy countries like Australia do not experience the basic economic problem of relative scarcity.’
In your answer,
a. explain the meaning of relative scarcity.
b. Identify and define the three categories of resources that are used to meet the needs and wants of society. Provide an example of each category of resource
Relative scarcity is the basic economic problem whereby our limited resources (land, labour, capital, enterprise) cannot meet our unlimited wants and needs. Therefore, decisions must be made as to which needs/wants are best satisfied.
This is a problem faced by all individuals and economies or countries, regardless of their level of wealth. Even though Australia is a very wealthy country with a large resource endowment, Australians still face finite resources, and so not every single want or need can be satisfied. Therefore, I do not agree with the statement, as it is not true. In fact, all countries and economies experience relative scarcity.
Natural resources are the gifts of nature, such as agricultural crops and minerals.
Labour resources are the various intellectual talents and physical power provided by the labour force, such as those of a doctor or an entertainer.
Capital resources refers to manufactured goods used in the production process, such as physical plant and machinery, which are used by a firm to help make other finished goods and services.
What is a “mixed market”? Outline 3 ways that governments can intervene in a market. (7.5 marks)
A mixed market is a form of economic system (answering the four basic questions of “what”, “how”, “how much” and “to whom”) that principally uses the market mechanism to determine questions of allocation of resources and distribution of goods and services, but, as a consequence of market failure, allows the government to also be involved in these decisions. Governments can intervene by directly producing goods and services or tendering such production out to private business (such as in the case of a public good or in circumstances where there would be a natural monopoly), it can regulate the production of goods with negative externalities, it can tax goods with negative externalities, it can subsidise goods with positive externalities, it can use progressive taxes and social welfare payments to decrease inequity, it can regulate where there is a concentration of market power.
d. Explain what is meant by an ‘under- utilisation of resources’ and describe how the PPF illustrates this concept. 1 marks
Underutilisation of resources means that there is spare capacity in the economy. Resources such as land, labour and capital are not being used as efficiently as their potential suggests they could be used. The production possibility frontier shows the levels of production possible when all available resources are being utilised to their fullest. Therefore, any point below/inside the PPF will indicate an underutilisation of resources.
e. Assume this hypothetical economy invests in new technologies that improves its productivity in the production of sugary soft drinks only. Predict how this is likely to affect the PPF. Illustrate this change on the graph you prepared for part a. 2 marks
New technologies have the potential to boost overall output of sugary soft drinks in the economy, if only sugary soft drinks are being produced. New technologies will not allow the economy to produce more bananas if it uses all its resources to produce bananas. Thus the PPC will be pushed outwards at all points except where all resources are used to produce bananas.
In many economies, the agricultural industry relies on international workers to harvest crops such as broccoli and sugar.
The current global COVID-19 pandemic has forced many countries and states (including Australia) to shut their borders, which has caused massive labour shortages within the agricultural sector.
Explain how a labour shortage caused by border closures throughout the COVID-19 pandemic is likely to affect the production possibility frontier of the hypothetical economy in its production of broccoli and sugar. Illustrate the impact on the graph in part a. 4 marks
- Labour is an essential resource for the production of both broccoli and sugar.
- When borders are closed this reduces the availability of labour as a productive resource, which causes a reduction in the ability and/or willingness of producers to supply within agricultural markets.
- If all other aspects of the economy remained unchanged, this shortage in labour has the potential to reduce overall efficiency and therefore capacity of agricultural production in this economy.
- This means that the agricultural sector will not be able to produce as much output of broccoli and/or sugar.
- As the sector’s overall productive potential of outputs has decreased, the production possibility frontier will move inwards, where every possible combination of outputs is smaller.
practice test 2 q4e
Refer to the production possibility frontier you plotted in part a.
Identify and justify which output combination(s) would be considered technically efficient, and state which output combination(s) are likely to be considered allocatively efficient. 4 marks
The production possibility frontier (PPF) represents the maximum production output possible when all of the economy’s resources are employed in the most efficient way. Therefore, by definition, all points on the PPF are considered technically efficient – the resources are being used in a way that they produce the maximum output possible at the lowest possible cost.
Only one point on the PPF will be considered allocatively efficient: that combination of outputs that maximises the benefit to and satisfaction of society. The specific point will depend on the values of the society under consideration.
A health-conscious society might decide that point A is allocatively efficient (50 tonnes of broccoli and 0 tonnes of sugar) because broccoli has health benefits, while sugar is a contributing factor to many health issues for people.
Marking guide:
1 mark for stating that all combinations on the PPF are technically efficient
1 mark for the justification
1 mark for explaining that a combination that maximises the overall benefit to society will be allocatively efficient
1 mark for stating that only one point on the PPF can be allocatively efficient and suggesting which point is most likely (a reference to society’s values must be made)
How do you answer when the question asks you to calculate opportunity cost? (format)
value of blablabla
Define the term opportunity cost (2 marks)
Opportunity cost is the value of the next best alternative foregone (given up) when a decision has been made.
how do you answer when an opportunity cost question is 2 marks?
breakdown what is gained what is lost
In moving from D to C, the economy can produce 25 more buses but gives up 30 cars. Hence, the opportunity cost is the value of 30 cars.
practice test 2 q4b
State whether it is possible for this hypothetical economy to produce 45 tonnes of broccoli and 65 tonnes of sugar at the same time. Justify your answer with reference to the nature of the production possibility frontier. 3 marks
It is impossible for this hypothetical economy to produce 45 tonnes of broccoli and 65 tonnes of sugar at the same time. This is because the production possibility frontier shows all the possible output combinations when all productive resources are being used most efficiently. This economy can only produce 45 tonnes of broccoli when it does not produce any sugar. Alternatively, it is only able to produce 65 tonnes of sugar when it does not produce any broccoli.
Marking guide:
1 mark for stating that it is impossible
2 marks for providing a reason (justification), including showing an understanding of what the PPF represents
a. Between 2020 and 2021, Australia experienced net negative migration (more people left
Australia than arrived), reducing the availability of labour across the economy.
Outline the likely effect on Australia’s productive capacity
A reduction in the availability of labour in the economy (as a result of net negative migration)
means the economy will have reduced productive capacity, as labour represents an important
factor of production. A reduction in the availability of resources will reduce the potential output of
the economy when it is producing at the maximum level possible.
This will shift the ppf inwards.
practice test 2 q2e
e. With reference to the diagram, explain why all output combinations on the PPF are productively efficient (technically efficient) but only one point will be considered allocatively efficient.
Sample response
All points on the PPC demonstrate the most an economy can produce with the resources available and using all available resources in production. This means that these points are technically efficient, whereby the highest level of output is being attained from resources. Hence, all points on the curve in the diagram created above are technically efficient. Only a single point on the curve is allocatively efficient, because at a point of time, society has a single preference as to the combination of buses and cars that will achieve the highest level of satisfaction. This combination could be, for example, where 150 cars and 50 buses are produced (combination C).
What is the economic problem and how does it relate to opportunity cost?
The economic problem arises because we have limited resources (land, labour, capital and enterprise) 1 mark. which we must allocate to satisfy our unlimited needs and wants 1 mark. This means that our resources are ‘scarce’ and we have to make choices between alternatives. 1 mark.
The economic problem is thus ‘how best to satisfy our unlimited needs and wants with our limited resources. When a society tries to solve this problem they ask the four basic questions, “What to produce?” “How much to produce”, What factors should be used in production?” and “How should production be distributed?”. 2 marks. Opportunity cost is the cost of a choice in terms of the next best alternative that we give up in order to satisfy a need and want. 1 mark. If we are best solving the economic problem we are choosing alternatives with the lowest opportunity cost. This maximises our satisfaction from our choices and results in allocative efficiency. 1.5 mark.
