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Economics

Unit 1

Scarcity, Choices and Opportunity Cost

6 topics · 24 practice questions · Free responseNot yet reviewed

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Notes

Scarcity and resources

  • Scarcity means limited resources and unlimited wants, so every society must make choices. A shortage is temporary; scarcity is permanent.
  • The four factors of production are land (natural resources), labor (human effort), capital (human-made tools) and entrepreneurship (risk-taking to start businesses). Their owners earn rent, wages, interest and profit.
  • Human capital is the skill and knowledge of workers. Better capital and training raise productivity, the output per unit of input.

Trade-offs and opportunity cost

  • Every choice is a trade-off. Opportunity cost is the value of the single next-best alternative given up, including time.
  • Ignore sunk costs, which cannot be recovered. Decide at the margin: continue while marginal benefit is at least marginal cost.
  • Incentives (rewards or penalties) shape behavior.

The production possibilities frontier

  • A PPF shows the most an economy can make of two goods. On the curve is efficient, inside is inefficient, outside is unattainable.
  • The curve bows outward because of increasing opportunity cost. Economic growth shifts it outward.

Thinking like an economist

  • Models simplify reality and hold other things constant (ceteris paribus).
  • Positive statements can be tested; normative statements say what should be.

Topics in this unit

Each topic has its own short notes and practice.

Practice

Sam can spend Friday night working a 5-hour shift at $14 per hour, going to a game with friends, or studying. He goes to the game, and working was his next-best choice. What is his opportunity cost?
A country's workers are well trained, but a factory sits idle during a recession. On its PPF, the country is producing:
A PPF shows that moving from 10 to 20 laptops costs 5 tablets, while moving from 20 to 30 laptops costs 15 tablets. This pattern illustrates:
A shoe company buys new stitching machines. Which factor of production has it added?
Which statement is positive rather than normative?
A theater's marginal cost of one more showing is $300, and the extra ticket revenue from that showing is $260. Using marginal analysis, the theater should:

Free response

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Free-response question

An island can produce fish and coconuts. The table shows its production possibilities. | Point | Fish | Coconuts | | --- | --- | --- | | A | 0 | 300 | | B | 10 | 280 | | C | 20 | 240 | | D | 30 | 160 | | E | 40 | 0 |

(a) Calculate the opportunity cost of one fish when moving from B to C, and when moving from C to D.

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B to C: 10 more fish cost $280 - 240 = 40$ coconuts, or 4 coconuts per fish. C to D: 10 more fish cost $240 - 160 = 80$ coconuts, or 8 coconuts per fish.

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(b) Identify the pattern in your answers to part (a) and explain why it happens.

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The opportunity cost of fish rises as more fish are caught. This is the law of increasing opportunity cost: resources such as workers and land are not equally suited to fishing and to growing coconuts, so as the island shifts more resources to fishing it must use ones that were very productive at growing coconuts.

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(c) Classify the combination of 20 fish and 200 coconuts, and the combination of 30 fish and 200 coconuts. Then give one change that could make the second combination possible.

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20 fish and 200 coconuts is inside the curve (the island could have 240 coconuts with 20 fish), so it is attainable but inefficient. 30 fish and 200 coconuts is outside the curve (only 160 coconuts are possible with 30 fish), so it is unattainable now. Better fishing boats, new farming technology, more workers or better training would shift the PPF outward and could make it possible.

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