Opportunity Cost and Scarcity Quiz

Opportunity Cost and Scarcity

• Opportunity cost is the value of the next best alternative given up when making a choice.
• Scarcity is the limited availability of resources to meet unlimited wants.
• Opportunity cost directly relates to scarcity as choices involve trade-offs.

Production Possibility Frontier (PPF)

• A PPF shows the maximum combination of two goods a country can produce efficiently.
• The PPF illustrates opportunity cost in terms of trade-offs between goods.
• The slope of the PPF represents opportunity cost.

Opportunity Cost and Manufactured Goods

• Opportunity cost of producing more manufactured goods increases as resources are reallocated, potentially becoming less efficient for that purpose.
• Higher costs arise as resources are shifted from more efficient uses.

Price and Quantity Demanded/ Price and Quantity Supplied

• Price and Quantity Demanded have an inverse relationship.
• Higher price leads to lower quantity demanded.
• Price and Quantity Supplied have a direct relationship.
• Higher price leads to higher quantity supplied.

Market Equilibrium

• Market equilibrium occurs when quantity demanded equals quantity supplied.
• Equilibrium is a state of balance in the market.
• If price is below equilibrium, excess demand (shortage) occurs.
• If price is above equilibrium, excess supply (surplus) occurs.

Effects of a Minimum Price

• A minimum price (price floor) set above market equilibrium leads to a surplus.
• The surplus can be addressed through government intervention.

Shift in Consumer Preferences

• Shifts in consumer preference toward a good causes higher demand, thus leading to price increases.

Increase in Hotel Workers' Wages

• Increased wages increase production costs.
• This causes a leftward shift in the supply curve of hotel accommodations.
• The equilibrium price thus increases and equilibrium quantity falls.

Price Elasticity of Demand (PED)

• Price elasticity measures the responsiveness of quantity demanded to price changes.
• The formula is % Change in Quantity Demanded / % Change in Price.

Firm's Supply Decision in the Short Run

• Total Product (TP): Total output produced by a firm with given input.
• Average Product (AP): Average output per unit of input (like labor).
• Marginal Product (MP): Additional output gained from adding one more unit of input.

Law of Diminishing Marginal Returns

• As more workers are added (with other factors constant), marginal product initially increases, then eventually falls.
• This leads to increasing marginal costs at some point.

Firm's Marginal Cost (MC)

• Marginal Cost: The change in total cost from producing one more unit of output.
• Formula: Change in Total Cost / Change in Quantity of Output

Connection between Marginal Product and Marginal Cost

• Inverse relationship between them.
• Increasing marginal product leads to decreasing marginal costs and vice versa.

Short Run vs Long Run for a Firm's Supply Decision

• Short Run: At least one factor is fixed, like capital. Firms can only adjust variable factors, like labor.
• Long Run: All factors (e.g., capital and labor) are variable. Firms can enter/exit the market.

Economies and Diseconomies of Scale

• Economies of Scale: Average total cost (ATC) decreases as the scale of production increases.
• Diseconomies of Scale: ATC increases as the scale of production increases due to inefficiencies.

Firm's Minimum Efficiency Scale (MES)

• MES is the smallest output level at which a firm achieves lowest ATC.
• MES affects market structure by determining the number of firms that can effectively compete.

Perfect Competition vs Monopoly

• Perfect competition: Many firms, identical products, easy entry/exit.
• Monopoly: One firm, unique product, high barriers to entry.

Production Possibility Frontier (PPF)

• PPF for Clothing and Electronics: A curve showing maximum combinations of two goods.
• Scarcity and Opportunity Cost: The PPF represents trade-offs when resources are limited.
• The PPF is typically downward sloping and concave.

Opportunity Cost as More Clothing is Produced

• Opportunity cost increases as more clothing is produced.
• This is due to diminishing returns as resources are shifted to clothing production.

PPF in Economic Recession and Capital Investment

• Economic recession: Economic activity is lower than potential.
• Capital investment: Increasing capital input leads to higher productivity and thus a rightward shift in the PPF.

Market Equilibrium

• Market equilibrium: Quantity demanded equals quantity supplied.
• Restoration of equilibrium: Price adjustments result in balance between demand and supply.

Price Elasticity of Demand (PED)

• PED measures demand sensitivity to price changes.

Demand-Supply Framework in the Rental Market

• Increased population increases demand for rental properties, thus increasing equilibrium price and quantity.
• Other factors (e.g., income, policies) also affect demand for rental properties.
• Rent ceilings limit rental supply, leading to shortages.

Short Run vs Long Run for a Firm's Supply Decisions

• Short Run: Firms adjust variable factors like labor.
• Long Run: Firms adjust all factors, including capital, and entry/exit of firms occurs

Long Run Average Total Costs, Economies and Diseconomies of Scale

• Long Run Average Total Cost (LRATC): Shows the per-unit cost when all inputs are variable.
• Economies of Scale: Decreasing average costs as production scale increases.
• Diseconomies of Scale: Increasing average costs with further scale increase due to lack in efficiency

Minimum Efficient Scale (MES)

• The smallest scale of production at which the lowest average cost is attained.
• MES affects market structure impacting number of firms and competitiveness

Perfect Competition vs Monopoly

• Perfect competition: Many firms, identical products.
• Monopoly: Single firm, unique product, high barriers to entry.