1. The Central Economic Problem

Question 1

Define opportunity cost.

Answer 1

OC is defined as the benefits of the next best alternative forgone.

Question 2

What is the PPC curve?

Answer 2

The Production Possibility Curve shows the different maximum combinations of goods and services that can be produced in an economy, given the level of resources and technology.

Question 3

What are the assumptions of PPC curve?

Answer 3

1. Only produces 2 goods/ services
2. Qty/ Qly of resources, and level of technology remain fixed
3. Resources are fully and efficiently employed

Question 4

Why the PPC curve is concave?

Answer 4

OC is increasing (more unites of one goods must be sacrificed in order to obtain additional unites of another good)
Resources are not homogeneous and therefore they are not perfect substitutes. As the economy concentrate on the production of one good, it has to start using resources that are less and less suitable. To produce an additional unit of a good means having to give up increasingly greater amounts of resources from the production of the alternative good. Hence greater amounts of alternative goods have to be sacrificed.