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What is the relationship between scarcity and opportunity cost?
What is the relationship between scarcity and opportunity cost?
What does the Production Possibility Frontier (PPF) illustrate about the relationship between two goods?
What does the Production Possibility Frontier (PPF) illustrate about the relationship between two goods?
How is the opportunity cost represented on a PPF?
How is the opportunity cost represented on a PPF?
What happens to the opportunity cost of manufacturing as a country moves along its PPF, producing more manufactured goods and fewer agricultural products?
What happens to the opportunity cost of manufacturing as a country moves along its PPF, producing more manufactured goods and fewer agricultural products?
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Which of the following best explains why the opportunity cost of producing manufactured goods increases as more manufactured goods are produced?
Which of the following best explains why the opportunity cost of producing manufactured goods increases as more manufactured goods are produced?
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Which of these describes a way to illustrate the concept of opportunity cost using a production possibility frontier (PPF)?
Which of these describes a way to illustrate the concept of opportunity cost using a production possibility frontier (PPF)?
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A country is operating below its production possibility frontier (PPF). Which of the following statements is true in this situation?
A country is operating below its production possibility frontier (PPF). Which of the following statements is true in this situation?
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Which of these is NOT a factor that could shift a country's production possibility frontier (PPF)?
Which of these is NOT a factor that could shift a country's production possibility frontier (PPF)?
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What does the Production Possibility Frontier (PPF) illustrate?
What does the Production Possibility Frontier (PPF) illustrate?
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Which of the following is NOT a factor that affects the position of the PPF?
Which of the following is NOT a factor that affects the position of the PPF?
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What happens to the opportunity cost of producing clothing as more clothing is produced?
What happens to the opportunity cost of producing clothing as more clothing is produced?
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What does it mean when an economy is operating inside the PPF curve?
What does it mean when an economy is operating inside the PPF curve?
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How does an increase in capital investment affect the PPF?
How does an increase in capital investment affect the PPF?
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What is the opportunity cost of producing an additional unit of clothing?
What is the opportunity cost of producing an additional unit of clothing?
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Which of the following would be considered a long-run factor that could shift the PPF?
Which of the following would be considered a long-run factor that could shift the PPF?
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What is the relationship between the PPF and the law of diminishing returns?
What is the relationship between the PPF and the law of diminishing returns?
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How does an increase in population affect the rental market?
How does an increase in population affect the rental market?
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What is the impact of a rent ceiling set below the equilibrium price?
What is the impact of a rent ceiling set below the equilibrium price?
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What is the main difference between a firm's supply decisions in the short run and the long run?
What is the main difference between a firm's supply decisions in the short run and the long run?
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What happens to a firm's supply curve in the long run if there is a decrease in demand for the firm's product?
What happens to a firm's supply curve in the long run if there is a decrease in demand for the firm's product?
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Which of the following is NOT a factor that can increase the demand for rented properties?
Which of the following is NOT a factor that can increase the demand for rented properties?
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If a firm is operating in the short run and experiences a sudden increase in demand for its product, what is likely to happen?
If a firm is operating in the short run and experiences a sudden increase in demand for its product, what is likely to happen?
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What is the concept of opportunity cost in the context of a firm's production decisions?
What is the concept of opportunity cost in the context of a firm's production decisions?
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Which of the following is a characteristic of the long run for a firm?
Which of the following is a characteristic of the long run for a firm?
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Study Notes
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.
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Description
Test your knowledge on opportunity cost and scarcity principles. This quiz covers essential concepts such as the Production Possibility Frontier and the relationship between price and quantity demanded. Understand how scarcity affects decision-making through trade-offs and resource allocation.
