Scarcity, Choice, Factors of Production, Opportunity Cost and the PPF
This section covers the foundation of the course: scarcity forces choice, every choice carries an opportunity cost, and the production possibility frontier (PPF) models trade-offs. The exam tests definitions, the four factors of production and their rewards, and your ability to apply opportunity cost in numerical and PPF questions.
Core rules
- Scarcity is relative: wants exceed the resources available. It is not the same as poverty.
- The four factors are land (reward: rent), labour (wages), capital (interest) and enterprise (profit). Capital means produced means of production, such as machinery; money is not capital in this sense.
- Opportunity cost is the value of the next best alternative forgone. It includes non-money costs, such as time.
- A PPF shows the maximum combinations of two goods produced with given resources and technology. A bowed-out PPF implies increasing opportunity cost because resources are not equally suited to both goods. Points inside are inefficient; on the frontier efficient; outside unattainable. Growth shifts the frontier outward.
Worked example
An economy can produce 100 units of software or 50 units of wheat. Starting at 100 software, it moves to 80 software and 10 wheat. The opportunity cost of 10 wheat is 20 software, so each wheat costs 2 software. On a bowed PPF, later wheat costs more software, showing increasing opportunity cost.
Traps
Do not call money capital. Do not describe opportunity cost as the money paid. Do not treat every point on the PPF as equally efficient. Do not say scarcity disappears when growth shifts the PPF: new wants emerge.