1. Explain the concept of opportunity cost.
Opportunity cost is that which has to be forgone in order to obtain a good or service
2. List goods, or services, that compete for your income. Similarly, list activities that compete for your time. In deciding what you will spend your income on and how you will allocate your time, do you minimize your opportunity costs?
Goods or services competing for your income might include rent, food, heating and travel. Activities competing for your time might include studying, work, sleep and leisure activities, such as the cinema, drinking and sport. In assessing whether you minimize your opportunity costs you need to examine what you decided to do, or consume, and compare these with what you decided not to do, or consume. If you minimized your opportunity costs, then you have chosen all the things that provide you with the maximum amount of benefit.
3. Consider whether it is ever possible to solve the problem of scarcity.
No, because resources are finite and wants are unlimited.
4. An economy produces two goods, Ferraris and Ray-Ban sunglasses. Using a production possibility frontier assess what must happen to the production of Ferraris, if the production of Ray-Ban sunglasses decreases.
Production of Ferraris would increase.
5. The same Ferrari and Ray-Ban economy receives an influx of migrant workers. What do you think will happen to the production possibility frontier for this economy?
It would move outwards to the right.
6. How does the production possibility frontier illustrate the concept of opportunity cost?
It depicts the trade-off between goods and/or services produced. As resources are used for the production of one commodity those resources cannot be used for the production of another.
7. Why does the law of diminishing returns require the production possibility frontier to be curved, rather than a straight line?
The slope of the production possibility frontier shows the opportunity cost of increasing the production of one type of good or service. For example, as more capital goods are produced the opportunity cost in terms of consumer goods foregone increases. This could result from the fact that some resources are more efficient in the production of one type of good, or that changing the proportion of factors employed in one form of production causes the output to increase at a decreasing rate. This is explained by the law of diminishing returns and gives the P.P.F a circular appearance.
8. Explain the resource allocation mechanism within a market economy and also a planned economy.
The recourse allocation mechanism within a market economy is the price mechanism/system. It is based on the idea of a competitive market in which no individual can influence the price of factors of production and no single firm can influence the market price of its product. A market exists when buyers and sellers of a particular commodity are in communication for the purpose of exchange. Market forces operate to satisfy the desire of one person to sell something and the desire of another to buy it. A price is agreed which is acceptable to both the buyer and the seller. Price acts as the mechanism which equalises the demand for and supply of a commodity.
A planned economy is a system in which all economic decisions are made by the central authorities; unlike the price/market system which assumes in its purest state no government interference in economic activity. In a command or planned economy a central planning body makes all the basic economic decisions, the state owns or controls all the factors of production and determines what to produce by assessments of consumer needs and the requirements of the state. Priorities are drawn up and production quotas set accordingly.
9. Using examples, highlight why your own economy is probably best described as a mixed economy.
A mixed economy is an...