Quick questions on Scarcity, opportunity cost and the PPF (QCE Economics Unit 1)

The basic economic problem is that resources are finite but human wants are essentially unlimited. Every individual, firm and society must make choices about how to allocate scarce resources among competing uses.

1. Land. All natural resources (minerals, water, agricultural land, fisheries, climate). 2. Labour. Human work effort, including both physical and mental.

Scarcity means the available factors of production are insufficient to satisfy all wants at zero price. Even Australia, an affluent advanced economy, faces scarcity:

Opportunity cost is the value of the next best alternative forgone when a choice is made. It is the most important concept in economics.

The PPF is a diagram showing the maximum combinations of two goods an economy can produce given its resources and technology. The PPF illustrates scarcity, opportunity cost and efficiency.

Movement along the PPF from one point to another shows the opportunity cost of producing more of one good in terms of the units of the other forgone.

The PPF shifts outward when the economy's productive capacity grows:

The PPF illustrates two efficiency concepts:

How societies answer the what, how and for whom questions:

Plot good X on the horizontal axis and good Y on the vertical axis. The frontier connects all points of maximum production.

Typically concave to the origin (bowed outward) because of increasing marginal opportunity cost: as more of one good is produced, increasingly specialised resources must be diverted, and the trade-off becomes steeper.

Suppose Australia produces two goods, healthcare and education.

Producing at minimum cost. On the frontier means productively efficient (cannot produce more of one good without producing less of the other).

Producing the mix of goods that maximises social welfare. The right point on the frontier depends on consumer preferences and externalities. A market economy achieves allocative efficiency if prices reflect true social marginal cost and benefit.

Opportunity cost is what you give up in the next best alternative, which may include non-monetary values.