Scarcity and Choice

• What is the basic economic problem?

  Scarcity - unlimited wants and limited resources
• Why do choices have to be made in economics?

  Because wants are unlimited and resources are finite
• If you have £1 and can buy either a chocolate bar or a packet of crisps, what does this scenario illustrate?

  The concept of scarcity and the need to make choices
• What is opportunity cost?

  The value of the next best alternative forgone
• In the example of choosing between crisps and a chocolate bar, what is the opportunity cost of choosing the crisps?

  The chocolate bar
• If a car is bought for £15,000 and depreciates by £5,000 after 5 years, what is the opportunity cost of keeping the car?

  £5,000
• Why is opportunity cost important to economic agents?

  It helps them make informed decisions about resource allocation
• What might a producer have to choose between when considering opportunity cost?

  Hiring extra staff or investing in a new machine
• What choice might a government face regarding opportunity cost?

  Spending more on the NHS or spending more on education
• What questions must an economy consider when producing goods?

  • What to produce: determined by consumer preferences
  • How to produce it: producers seek profits and minimize costs
  • For whom to produce it: based on purchasing power
• What are economic goods?

  Goods that benefit society, have scarcity, and an opportunity cost
• Why do consumers pay for economic goods?

  Because they have value due to scarcity
• What are free goods?

  Goods that have no opportunity cost and are not scarce
• Give examples of free goods.

  Air and water
• Why are free goods not traded?

  Because they are freely available
• What do production possibility frontiers (PPFs) depict?

  The maximum productive potential of an economy using a combination of two goods or services.
• How do PPF curves illustrate opportunity cost?

  They show the trade-off between producing different goods using scarce resources.
• If the scarce resource is milk, what is the trade-off when producing more cheese or yoghurt?

  Producing more yoghurt incurs an opportunity cost of producing less cheese.
• What does producing at points A and B on the PPF indicate?

  They are the most efficient combinations of output on the PPF.
• What does the law of diminishing returns state regarding yoghurt production?

  The opportunity cost of producing more yoghurt increases in terms of lost cheese production.

  
• What does producing at points C or D on the PPF indicate?

  It indicates inefficient production where resources are not fully utilized.
• What does producing at point E represent in relation to current resources?

  It is not yet attainable with the current resources.
• If producing 100 units of cheese means only 40 units of yoghurt can be produced, what is the opportunity cost of producing cheese?

  The opportunity cost is 90 - 40 = 50 units of yoghurt.
• How does the PPF depict economic growth or decline?

  Economic growth is shown by an outward shift in the PPF, while decline is depicted by an inward shift.
• What does production outside of the PPF indicate?

  It is not obtainable with the current resources.
• What assumptions are made when drawing the original PPF curve?

  It assumes a fixed amount of resources and a constant state of technology.
• What effect does an increase in the quantity or quality of resources have on the PPF curve?

  It shifts the PPF curve outwards, indicating increased productive potential and economic growth.
• How does moving along the PPF differ from shifting the PPF?

  Moving along the PPF uses the same resources, while shifting the PPF involves using more or higher quality resources.
• What does a straight line PPF indicate about marginal opportunity cost?

  A straight line PPF indicates that the marginal opportunity cost is constant.
• Why is a concave PPF more realistic than a straight line PPF?

  A concave PPF shows increasing opportunity cost, reflecting that producing more of one good decreases the output of another good more significantly.