Production Possibility Curves and Opportunity Cost

Question 1

Opportunity Cost

Answer 1

• the best alternative forgone

e.g. if you consume a Mars Bar, you must forgo a Crunchie. If Norm collegs mangoes, he cannot collect sticks

Question 2

Production Possibilities Curve (PPC/PPF)

Answer 2

The PPC shows the combination of two goods that can be produced using full empoyment of resources

In this model, we assume:

• that only two goods are produced in the econonmy i.e. good X and good Y
• all resources (in economy) are used (in the best alternative use).

additional assumption mentioned in our textbook:

• the resources and state of technology are fixed

Question 3

Changes in the PPC

Answer 3

The production possibility frontier may be pushed outward:

• increase in technology
• increase in the stock of resources

Question 4

Why are PPCs curved?

Answer 4

Law of increasing costs (sometimes called the law of increasing opportunity costs).
As we allocate more resources to produce one good, the opportunity cost for each additional unit rises increasingly.

Question 5

PPCs show Economic Growth

Answer 5

Each economy can produce XXX of good X and XXX of good Y –> Over time, the productive capabilities of this economy improve –> shift the curve outward from A to B –> The economy can now produce XXXX of good X and XXXX of good Y

Question 6

The PPC can be used to show these key concepts

Answer 6

Scarcity
Choice
Efficiency

Question 7

Which point is unattainable?
1. A
2. B
3. C
4. D
5. E
6. F
7. G

Answer 7

G

Question 8

Which points are attainable?
1. A
2. B
3. C
4. D
5. E
6. F
7. G

Answer 8

A, B, C, D, E

Question 9

Which point shows under utilization of resources?
1. A
2. B
3. C
4. D
5. E
6. F
7. G

Answer 9

F

Question 10

How to calculate opportunity costs?

Question 11

What is economics?

Answer 11

A social science which studies human behavior and the way in which we choose among the alternate uses of scarce resources to satisfy wants

Question 12

Factors of Production

Answer 12

Land
Labour
Capital
Entrepreneurship

Question 13

Normal good

Answer 13

• As income increases, quantity demanded increases
• as price increases, quantity demanded decreases

Question 14

Inferior good

Answer 14

• As income increases, quantity demanded decreases
• As price increases, quantity demanded decreases

Question 15

Constant Opportunity Cost

Question 16

Increasing Opportunity Cost

Question 17

Circular Flow of Income