U1 AOS1 - Lesson 3 - Opportunity Costs & PPF Flashcards
Opportunity Cost
The value of the next best alternative that is foregone whenever a choice or decision is made.
- Examples:*
- You have $50 in your pocket, you decide to go out for dinner with some friends, instead of buying a new shirt for summer = opportunity cost is the new shirt*
- Free pizza is being offered on Enderly lawn, however there is a long queue, what is the opportunity cost of consuming a piece of pizza? = opportunity cost is the time spent in line.*
Cost Benefit Analysis
Weighting up the positives and negatives of an economic decision to conclude whether an economy is better or worse off
Production Possibility Frontier
A theoretical diagram which shows all of the potential production combinations of a country which is producing 2 similar goods or services.
This helps to identify production possibilities which achieve productive or allocative efficiency as well as identify opportunity costs and trade offs.
True/False: All points along the PPF are allocatively efficient
False: Only one point is allocatively efficient, all points along the curve are technically/productively efficient.
True/False: The production foregone when producing the next best alternative is known as a trade-off
False: that is the opportunity cost
True/False: A point inside of the production possibility curve is an inefficient allocation of resources
True: insides the PPF it means that a nations resources are not being used to their full capacity.
VCAA 2023 Q1:
A young entrepreneur has run her own business and made a profit of $40 000 for the financial year. She quit her job as an economist, where she would have earned $120 000 for the same period.
The opportunity cost of running the business for the financial year was
A. $40 000
B. $80 000
C. $120 000
D. $160 000
B or C
Answer Breakdown in the state:
77% B
21% C
=98% correct
VCAA 2023 Q13
Consider the following production possibility frontier (PPF) for a hypothetical nation.
A movement from point X to point Y is least likely to result in
A. an increase in technical efficiency.
B. an increase in the nation’s real GDP.
C. a decrease in the nation’s unemployment rate.
D. a decrease in negative production externalities.
D
Answer breakdown in State:
62% correct
VCAA 2021 Q5
The opportunity cost of building a new road network could be
A. increased noise pollution.
B. a reduction in public transport usage.
C. the inability to adequately fund education.
D. the road levy charged to all users of the road.
C
Answer breakdown in State:
86% correct
Point of Difference between Opportunity Cost and Relative Scarcity
Whether the concept is the underlying need for decisions to be made on how to allocate resources or not.
Relative scarcity is the reason why decisions need to be made on how to allocate resources.
Opportunity cost is the result oft of relative scarcity.
VCAA 2019
Daphne can make either three dresses or nine shirts per hour.
For Daphne, the opportunity cost of making an extra dress is
A. one-third of a shirt.
B. one-third of a dress.
C. three shirts.
D. nine dresses.
C
Relationship between Cost Benefit Analysis and Opportunity Cost
Opportunity Costs mean that there are differing costs and benefits that are associated with decision making. Cost benefit analysis allow for informed decision making and consideration of the advantages and disadvantages.
Linda works at McKinsey’s where she earns $150,000 a year after taxes. She gets paid
monthly, and she does not save anything month to month. Working at McKinsey is
currently the best use of her time.
Linda considers giving up her McKinsey job, and setting up her own business instead. To
set up an office, she could buy a suitable space for $50,000 – money that she has from
other past savings. Should Linda decide to sell the space at any point, she would get back
exactly $50,000. The annual rate of interest paid by commercial banks for deposits is 1%.
What is the opportunity cost to Linda of setting up her own business for a year?
Cost of working at McKinsey
= $150,000 + (1% × $50,000)
=$150,500 per annum
Exclude cost of purchasing the office as she will get exactly that money back if she sold the office
Umair and Bhoomi are farmers; In a day, Umair can produce 3kg of strawberries or 6kg of eggplants, Bhoomi can produce 4kg of strawberries or 12kg of eggplants.
Plot Umair and Bhoomi’s production possibility frontier (PPF) placing strawberries on the x axis.
Can only produce one or other - can’t produce combo so straight line
Which factor could explain the movement of the PPF below?
A. Spare capacity
B. Higher costs of production
C. Greater consumer demand
D. Greater availability of resources
D
Spare capacity would be illustrated as a point inside the frontier
True/False:
Opportunity cost is the loss of production that occurs when scarce resources are diverted into their next most productive use
True
Productive capacity refers to the…
A. minimum total output of goods and services that an economy can produce
B. maximum total input of goods and services an economy can produce
C. minimum total output of goods that an economy can produce
D. maximum total output of goods and services that an economy can produce
D
Which of the following would have a different impact on the PPF than the other three?
A. 190,000 migrants arriving in a calendar year
B. $4.5bn of foreign investment into a new copper mine
C. A severe drought affecting northern Australia
D. Completion of the NBN
C is the only factor that would move the PPF inward
The table outlines the maximum amount of meat pies or sausage rolls that can be produced in a day.
- What is the opportunity cost for both Bart and Lisa for producing an additional sausage roll?
- What is the opportunity cost for both Bart and Lisa for producing an additional meat pie?
Which of the following can be easily shown on a PPF?
A. Currently unattainable output combinations
B. Unemployment and incomes
C. Rises in productivity and economic growth
D. All of the above
A
Hard to indicate macroeconomic indicators (unemployment, productivity and economic growth) on a PPF as it is limited to two goods/services
Bob is deciding whether to continue his job as an Uber driver. In the past, he has paid to get government registration to be able to work for Uber. If he continues to work for Uber Bob expects it will take 10 hours of his time each week, $50 per week in depreciation on his car and $50 per week in petrol costs. Bob wants to
calculate the opportunity cost of continuing to drive. Which of the following is correct?
A. Bob should not include a cost for his time in the calculation of opportunity cost
B. Bob should not include the cost of government registration in the calculation of opportunity cost
C. Bob should include the cost of government registration in the calculation of opportunity cost
D. Bob’s opportunity cost is $100 per week
B - government registration will be paid regardless of whether Bob continues as an Uber driver or not - therefore, Bob will not ‘save’ money on rego if he stops being an Uber driver.
