1.3 Opportunity Cost and PPC

• What does opportunity cost represent in economics?

  The next best alternative forgone when an economic decision is made
• Why is opportunity cost considered one of the most important economic concepts?

  It represents what has been sacrificed in an economic decision
• What is a production possibility curve (PPC)?

  • Shows maximum output combinations of two goods/services
  • When utilising current resources and technology, in a given time period
  • Illustrates concepts of scarcity, choice, and opportunity cost
• What are other names for production possibility curves (PPCs)?

  Production possibility frontiers (PPFs) or opportunity cost curves
• What does it mean when an economy is producing on its PPC?

  The economy is producing at full capacity using all resources efficiently and is therefore productively efficient
• What does it indicate if output combinations are below the PPC?

  There is a loss of productive efficiency
• What do output combinations F and G represent on the PPC?

  They are unattainable with current resources and technology. Scarcity of resources limits output to points on or below the PPC
• How does reallocating resources from consumer goods to capital goods illustrate opportunity cost?

  It shows the consumer goods that must be sacrificed to increase capital goods
• What happens to opportunity cost when moving along a curved PPC?

  Opportunity cost increases as more of one product is produced
• What does a straight line PPC illustrate about opportunity cost?

  It illustrates constant opportunity cost
• What does productive efficiency mean in the context of a PPC?

  It means producing at a point on the PPC using all resources effectively
• What is allocative efficiency in relation to a PPC?

  It is when resources are allocated to maximize total social welfare
• What causes an outward shift of the PPC?

  An increase in the quantity or quality of resources or improvement in technology
• What does an inward shift of the PPC indicate?

  It indicates a reduction in the quantity or quality of resources available
• What are the factors that cause the PPC to shift outward?

  • Acquisition of more factors of production
  • Improvement in the productivity of existing factors
  • Advances in technical knowledge
• What are the factors that cause the PPC to shift inward?

  • Loss of factors of production
  • Decrease in productivity of existing factors
  • Fall in the quality of factors
• What is the definition of opportunity cost in economic terms?

  The next best alternative forgone when an economic decision is made
• How does the PPC illustrate actual economic growth?

  By showing increases in actual output from one point to another on the curve
• How does the PPC illustrate potential economic growth?

  By shifting the entire curve outward due to increased productive capacity
• What was the impact of the 2015 earthquakes on Nepal's PPC?

  It shifted the PPC inward due to destruction of resources
• What is the relationship between productive efficiency and points on the PPC?

  • Points on the PPC indicate productive efficiency
  • Points below the PPC indicate inefficiency
  • Only one point on the PPC can achieve both productive and allocative efficiency and this point is known as economically efficient
• What is the significance of point X on the PPC?

  • It represents the combination of products that maximizes social welfare
  • It is the only point that achieves both productive and allocative efficiency
• What does the term 'trade-off' mean in the context of opportunity cost?

  • It refers to the sacrifice of one option to pursue another
  • It highlights the choices made when allocating limited resources