Economics: Scarcity and Opportunity Cost

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Questions and Answers

What is the primary factor that necessitates choices in economics?

  • Government regulations on production.
  • The fundamental problem of scarcity. (correct)
  • The abundance of resources.
  • Fluctuations in market demand.

Which statement best describes the relationship between scarcity and choice?

  • Choice is unnecessary when resources are scarce.
  • Choice leads to scarcity by over consumption.
  • Scarcity arises due to choices made by consumers.
  • Scarcity necessitates choices due to limited resources. (correct)

What does the concept of opportunity cost primarily represent?

  • The cost of production for a business.
  • The depreciation of capital goods.
  • The value of the next best alternative that is forgone. (correct)
  • The monetary price of a good or service.

What differentiates scarcity from a shortage?

<p>Scarcity is a long-term universal issue; a shortage is a temporary specific problem. (D)</p> Signup and view all the answers

A country can produce either 500 cars or 1000 bicycles with its resources. What is the opportunity cost of producing one car?

<p>2 bicycles. (B)</p> Signup and view all the answers

If a country decides to allocate more resources to healthcare, what economic concept is involved when considering the reduced production of education services?

<p>Opportunity cost. (C)</p> Signup and view all the answers

Which of the following best describes the measurement of opportunity cost?

<p>In terms of units of the sacrificed goods or services. (C)</p> Signup and view all the answers

What is the implication of scarcity for satisfying human wants?

<p>It means some wants may not be satisfied. (B)</p> Signup and view all the answers

What does the concept of opportunity cost primarily arise from?

<p>The scarcity of resources and their alternative uses. (D)</p> Signup and view all the answers

Which of the following is NOT an assumption when constructing a Production Possibilities Frontier (PPF)?

<p>There are fluctuations in technology throughout the year. (B)</p> Signup and view all the answers

According to the provided text, points inside the PPF represent what type of production?

<p>Attainable but inefficient production. (A)</p> Signup and view all the answers

What does movement along the PPF signify?

<p>A shift in society's preferences between products. (D)</p> Signup and view all the answers

What does the law of increasing opportunity cost imply for the shape of the PPF?

<p>It makes the PPF concave to the origin. (C)</p> Signup and view all the answers

According to the provided data in Table 2.1, what is the opportunity cost of producing 500 more computers when moving from production alternative B to C, in terms of food?

<p>100 metric tons of food. (C)</p> Signup and view all the answers

Which of the following best describes economic growth in terms of the PPF?

<p>The outward shift of the PPF. (B)</p> Signup and view all the answers

What are the two main drivers of economic growth?

<p>An increase in the quantity and quality of economic resources and advancements in technology. (D)</p> Signup and view all the answers

What is asymmetric growth, regarding the PPF?

<p>A shift of the PPF only along one of the axes. (A)</p> Signup and view all the answers

Why do opportunity costs increase when more of one good is produced on the PPF?

<p>Because economic resources are not completely adaptable to alternative uses. (D)</p> Signup and view all the answers

Flashcards

Scarcity

The fundamental economic problem of having unlimited wants but limited resources.

Choice

The act of making a decision between two or more options due to limited resources.

Opportunity Cost

The value of the next best alternative that is sacrificed when making a decision.

Scarcity vs. Shortage

A good is scarce if the amount available is less than the amount people want at zero price.

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Limited Resources

The idea that all resources are finite and cannot be expanded to fulfill all human needs and wants.

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Opportunity Cost (Definition)

The value of the highest-valued alternative foregone.

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Choice Implies Sacrifice

The act of choosing one option over another implies a sacrifice of the alternative.

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Measuring Opportunity Cost

The value of the next best alternative foregone is measured in terms of goods and services, not money.

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Production Possibilities Frontier (PPF)

A curve that shows the maximum possible combinations of two goods that can be produced with a given level of resources and technology.

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Production Efficiency

A situation where an economy is producing the maximum output possible with its resources.

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Resource Allocation

The distribution of limited resources to different production activities or uses.

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Trade-Off

A situation where an economy can produce more of one good only by producing less of another good.

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Law of Increasing Opportunity Cost

The increase in the opportunity cost of producing a good as more of that good is produced.

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Economic Growth

An expansion of the PPF, indicating an increase in the economy's ability to produce goods and services.

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Asymmetric Growth

A shift of the PPF along one axis, representing an increase in productivity in a specific sector.

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Inefficient Production

A situation where an economy is producing inside its PPF, indicating inefficient use of resources.

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Unattainable Production

A situation where an economy is producing outside its PPF, indicating an unattainable production level.

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Study Notes

Scarcity

  • The fundamental economic problem is scarcity, meaning limited resources to meet unlimited wants.
  • Scarcity is the imbalance between desires and the means to fulfill them, not a shortage.
  • A shortage is a temporary problem, scarcity is continual.
  • If resources were abundant, there would be no economic problems.

Choice

  • Scarcity limits output, forcing choices.
  • Individuals, firms, and governments must choose what to produce, how much, and what to forgo.
  • Scarcity implies choice and opportunity cost.

Opportunity Cost

  • Opportunity cost is the value of the next best alternative forgone.
  • For example, if a country can produce either cloth or computers, the opportunity cost of a meter of cloth is the computers that could have been made instead.
  • Opportunity cost is measured in terms of goods and services, not money.
  • Opportunity cost reflects substitution, where the cost of more of one good is the sacrificed output of another.
  • Increasing opportunity cost arises due to specialization; resources are better suited to some productions than others.

Production Possibilities Frontier (PPF)

  • The PPF shows possible combinations of goods a society can produce with limited resources and technology.
  • Assumptions for PPF: fixed resources, two outputs, full employment/production, no technology change, and specialized inputs.
  • Points on the PPF are attainable and efficient; inside the curve are attainable but inefficient; outside the curve are unattainable.
  • PPF illustrates scarcity, choice, and opportunity cost (downward slope).
  • The law of increasing opportunity cost explains why the PPF is concave.

Economic Growth

  • Economic growth is an increase in total output.
  • It occurs through increased resources (quantity and quality) and advancements in technology.
  • Economic growth shifts the PPF outward.
  • Asymmetric growth occurs when technology improves in one sector, shifting the PPF along one axis.

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