Protected: 1.1.4 – the need for trade-offs and cost-beneAnalysis and their relationship to opportunity cost

Question 1

Difference between a current and future trade-off

Answer 1

Current trade-off:

• Refers to an option that is considered against alternative options within the next 3 years

Future trade-off:

• Refers to an option that is considered against alternative options that exist after 3 years

Question 2

Difference between opporunity cost and a trade-off

Answer 2

Trade-off:

Is where an option is considered against a range of other alternative options

Opportunity cost:

is just between one option and the next best alternative

Question 3

What is the cost analysis benefit?

Answer 3

Determining the

• expected costs in both the long-term and short-term

Compared against:

• expected benefits in both the long-term and short-term

Question 4

Households:

one current trade-off

Answer 4

Current consumption:
- Buying expensive luxuries

Impact:
- Greater-self esteem

The trade-off in the future:
- Less savings

Overall they gave up:

• House deposit not saved
• Can’t buy a car in the future

Question 5

Households:

one future trade-off

Answer 5

Current consumption:

• Overall decrease in buying expensive luxuries

Impact:

• Feel less wealthy

By trading-off current consumption for future-self:

• Buying expensive luxuries

Overall they gave up (as current-self)

• loss of holiday
• Material posessions

Question 6

Businesses:
Current trade-off

Answer 6

Cause:

• Positive business cycle (high demand for goods and services)

Result (current-consumption):
- Increase spending

Impact:

• Expand business

Trade-off in the future:

• Less wealthy

Overall they gave up:
- Future expansion

Question 7

Businesses:
Future trade-off

Answer 7

Cause:
- Negative business cycle (low demand for goods and services)

Result (current-consumption):
- Decreased spending

Impact:

• Decrease in capital investment

Trading-off current consumption for future-self:

• Save more

Overall they gave up (as current-self):

• Decrease in profit because profits were allocated to improving in-efficient factory equipment
• Poor reputation and productivity

Question 8

Government:
Current trade-off

Answer 8

Current consumption using income earned on taxes:
- Improving infrastructure

Impact:

• Well functioning economy for the meantime

Trading-off current consumption for future consumption:

• Ageing population suffer because of poor pension payments

Overall they gave up in the future:

• Excellent living standards

Why:

budget deficits affect the aging population’s savings

Question 9

Government:
Future trade-off

Answer 9

Current consumption:
- overall decrease in government expenditure

Impact (as current-self)

• Poor reputation for not efficiently allocating enough funds to improve Australia’s dire economic state

Trading off-current consumption for future consumption:

• The ageing population can depend on Australia as support for when they retire

Overall (they gave up as current-self)

• Poor infrastructure