c. Explain how health reform initiatives such as the Affordable Care Act represent a choice about how resources are allocated, and the possible consequences of this choice. Choosing one option means the other option has to be forgone. Choice of opportunity 3 causes, loss of opportunities 1 and 2. In fact, it is related to the problem of allocation of resources to different use. 6 Things about Successful Video Marketing – You Must keep in mind. We live in a world of limited resources, but we seem to have unlimited wants. Specialisation 4. Scarcity, choice, and opportunity cost can be illustrated with the aid of a production possibilities curve (PPC), also called a Production Possibilities Frontier (PPF). Different points of PPF denote alternative combination of two commodities that the country can choose to produce. However, … This gives rise to the problem of choicewhich in turn is the crux of the economic problem. Scarcity implies that a production possibilities curve is downward sloping; the law of increasing opportunity cost implies that it will be bowed out, or concave, in shape. There are some basic questions faced by every society. For … The applications are: 1. The bowed-out curve of Figure 2.5 “The Combined Production Possibilities Curve for Alpine Sports” becomes smoother as we include more production facilities. For an individual, it may involve choosing the best from the choices available. Some of these things are very important for our existence. Therefore, the long run is the time which is taken by a firm to change all of its factors of production. During the very long run, not only are the labor, capital, land, and entrepreneurship inputs variable, but so too are key production inputs such as government rules, technology, and social customs. So there is scarcity of resources in the economy. super helpful notes only that the macro economy and government macro intervention isn’t present here 🙂, Basic economic problem: choice and the allocation of resources, The allocation of resources: how the market works; market failure, Advantages and disadvantages of the market system, The private firm as producer and employer, Changes in the structure of business organisations, Determinants of demand for factors of production, Labour-intensive and capital-intensive production, Total and average cost, fixed and variable cost, Relationship between average cost and output, Profit maximisation as a goal of business organisations, Pricing and output policies in perfect competition and monopoly, Main reasons for the different sizes of firms, The individual as producer, consumer and borrower, Functions of central banks, stock exchanges, commercial banks, Factors affecting an individual’s choice of occupation, Changes in an individual's earnings over time, differences in earnings between different groups of workers, Trade unions and their role in an economy, Expenditure patterns of different income groups, The government’s influence on private producers, Measures and indicators of comparative living standards, How a consumer prices index/retail prices index is calculated, Changing patterns and levels of employment, Why some countries are classified as developed and others are not, Consequences of population changes at different stages of development, The effects of changing size and structure of population on an economy, Benefits and disadvantages of specialisation at regional and national levels, Structure of the current account of the balance of payments, Competitive Markets- How they work and why they fail, Determining the Price, Functions of Prices, Consumer/Producer Surplus, Wage rate determination in labour markets, How governments attempt to correct market failure, Glossary of Unit 2 : Managing the economy, Determining the price level and equilibrium level of real output, Causes, costs and constraints on economic growth, Demand-Side Macroeconomic Policy Instruments, Business Economics and Economic Efficiency, Comparing the monopolist and perfect competition, Government intervention to promote competition, Basic economic ideas and resource allocation, The margin: decision making at the margin, Social costs and benefits; cost-benefit analysis, Movements along and shifts of a demand curve, Price, income and cross-elasticities of demand, Equilibrium and Disequilibrium in the market, The workings/functions of the price mechanism, Direct provision of goods & services by the government, Green Capitalism – How it can save our planet, The American Iceberg: Debt, Inflation, and Money – By Bob Blain, Modern Economic Problems by Frank A. Fetter, The Principles of Political Economy, and Taxation by David Ricardo, Political economy by William Stanley Jevons, The Wealth of the People: Your Wealth By Fernando Urias, The Wealth of the People: Your Neighbor’s Wealth By Fernando Urias, The Wealth of the People: The Wealth of the Market By Fernando Urias, Economics of Freedom : What Your Professors Won’t Tell You. Owlgen 517 . The production possibilities frontier is used to illustrate the economic circumstances of scarcity, choice, and opportunity cost. It is also because resources have alter native uses. This is known as the long-run. Comparing opportunity 3rd with opportunity 2 we find that loss of 12 ton wheat (worth 24,000) is the maximum loss that we one suffering when we are choosing opportunity 3 (which happens to be the best opportunity, This maximum loss of 12 ton wheat (worth 24,000) is the opportunity cost of using land for the production of sugarcane. A production possibility frontier is used to illustrate the concepts of opportunity cost, trade-offs and also show the effects of economic growth. Explain how a PPC/F can be used to illustrate scarcity, choice, opportunity cost and productive efficiency. A government may have to choose between different development projects. The want that is forgone is called the ‘opportunity cost’. Consuming or producing more of one thing means consuming or pro- ducing less of something else. Production Possibility Frontier . Scarcity implies that a production possibilities curve is downward sloping; the law of increasing opportunity cost implies that it will be bowed out, or concave, in shape. Efficiency. Next Topic: Different allocative mechanisms. Explain that a production possibilities curve (production possibilities frontier) model may be used to show the concepts of scarcity, choice, opportunity cost and a situation of unemployed resources and inefficiency. The want that is forgone is called the ‘opportunity cost’. This question will be answered by those supplying the goods and services. The diagram above is a PPC that plots the quantity of guns and the quantity of butter produced in an economy. For example, a student may have to choose between doing A levels and going for a diploma right after finishing O levels. 4 Key Assumptions 1. The model is used to improve our understanding of trade-offs by considering a simplified economy that produces only two goods . This chapter further examines this theme by examining two economic models, the production possibilities frontier and budget constraint, to illustrate specific opportunity costs that result from people's choices. Question 1. The basic economic problem is one rooted in both the natural world and in human greed. Due to the skills upgrading and push … The Irrelevance of Sunk Costs 6. Is it true? The firms will follow this because this is the most profit maximizing combination. Analyse this statement. Scarcity causes price. Any point on the curve is _____ efficient (you are using all your resources to the fullest) Any point inside the curve is _____ inefficient (you are NOT using all your resources to … However I must say that some people are content with what they already have. It specifies the alternative outputs that can be achieved with different levels of inputs. The opportunity cost of using scarce resources for one thing instead of something else is often represented in graphical form as a production possibilities curve. The study of economics begins with the study of scarcity—the universal economic problem—and the choices people make to satisfy their needs. In figure, PP is the Production Possibility Curve. It is used to explain the basic economic concepts: Scarcity… To think about the trade-offs that face any economy (comparing the costs and benefits), economists use the Production Possibilities Curve. This occurs when resources are less adaptable when moving from the production of one good to the production of another good. In the perspective of an individual firm, the short-run is when at least one of its factors of production is fixed. The bowed-out production possibilities curve for Alpine Sports illustrates the law of increasing opportunity cost. The problem of ‘Wheat to produce i.e. Marginal Decision Making 5. Other models help explain how market … By subscribing, you agree to our privacy policy. Consuming or producing more of one thing means consuming or pro-ducing less of something else. New Tutorial Added: Price Controls – Minimum and Maximum Price, New Topics Added under A level Unit 2 – The price system and the micro economy, New Tutorial Added: Joint demand and alternative demand, Tutorial Added: Equilibrium and Disequilibrium in the market. Greater the scarcity of a time, higher in its market price. Illustration: Using a given piece of land (and other inputs). Write the correct answer on the answer blanks, or … Production Possibility curve is also known as Production Possibility frontier or Transformation Curve. Definitely, resources are scarce. This chapter further examines this theme by examining two economic models, the production possibilities frontier and budget constraint, to illustrate specific opportunity costs that result from people's choices. Human beings, in order to survive need a lot of things. The Production Possibilities Curve (PPC) is a model used to show the tradeoffs associated with allocating resources between the production of two goods. Points within the curve show when a country’s resources are not being fully utilised The Production Possibility Frontier (also called the) Transformation Curve, Production Possibility Curve n The production possibilities frontier (PPF) shows the different combinations of two goods (and services) … This information is represented on a curve known as Production Possibility Curve as shown below. Governments have to decide on the best possible way to allocate resources (example – where and what kind of factories must be built), the firms have to decide how to maximize profit (what is the most efficient way to produce goods) and individuals have to decide how to maximize their welfare (which goods will give them most satisfaction). Increasing opportunity costs occurs when you produce more and more of one good and you give up more and more of another good. The government may decide to produce an essential good or service which everyone ought to have. 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