Week 2 - Opportunity Cost, PPC

Question 1

Resource Allocation

Answer 1

• the choice/decision about how scarce natural, labour and capital inputs are to be used or distributed among competing areas of production

Question 2

Opportunity Cost

Answer 2

• when all resources are fully and most efficiently used in production, a decision to produce more of one type of good/service means reduced production in another area
• IT is the cost of the benefit forgone or given up when resources are used in the production of the next best alternative forgone –> THE NEXT BEST CHOICE
• individuals maximise in pursuing self-interest –> assume that people’s objectives will be those that serve at their own self-interest

Question 3

Choices made at the margin

Answer 3

• margin is the current level of activity –> the edge from which a choice is to be made
• a choice at the margin is a decision to do a little more or a little less of something
• What is the extra cost/extra benefit you would incur

Question 4

PPC

Answer 4

Used to understand:

• basic economic problem of relative scarcity
• concepts of efficiency/inefficiency in resource allocation
• there will always be an OC
• scarcity of resources means it is not possible for the nation to produce max quantities of g/s at the same time

Question 5

Key Assumptions of PPC

Answer 5

• only two types of output can be produced
• the nation fully uses its scarce natural, labour or capital resources to produce g/s –> no resources are unemployed, wasted or left idle
• at a point in time, it is assumed that the total quantity/volume of productive resources available to a nation are fixed or limited
• the nation uses the most efficient production methods now available or the best practice permitted by current technology