Introductory Microeconomics: Scarcity, Opportunity Cost and the PPF
This domain tests the foundations of price theory: how scarcity forces choice, how the production possibility frontier (PPF) measures opportunity cost, and how economists separate micro from macro and positive from normative statements. Questions are usually definition-plus-diagram, with one numerical on marginal rate of transformation.
Scarcity and the central problems
Microeconomics studies individual units - one consumer, one firm, one market. Macroeconomics studies aggregates such as national income and the general price level. Because resources are scarce relative to wants, every economy faces three central problems: what to produce, how to produce, and for whom to produce. Market, planned and mixed economies answer these differently.
Opportunity cost and the PPF
Opportunity cost is the next best alternative forgone, not the money paid. The PPF shows all combinations of two goods that can be produced with full, efficient use of given resources and technology. It is concave to the origin because resources are not equally efficient in both uses, so marginal opportunity cost (MRT) rises. Points inside the curve mean unemployment or inefficiency; points outside are unattainable; a rightward shift requires more resources or better technology.
Worked example
A PPF gives (rice, cloth) = (0, 100), (1, 90), (2, 70), (3, 40), (4, 0). MRT = cloth sacrificed ÷ rice gained = 10, 20, 30, 40 for the four successive units. The first unit of rice costs 10 units of cloth, the fourth costs 40, so MRT rises and the curve is concave: resources suited to rice must be pulled increasingly out of cloth.
Traps
Positive statements describe what is and can be tested; normative statements say what ought to be and carry value judgement - "should" in a stem usually signals normative. A movement along the PPF is reallocation; a shift outward is growth. Money spent is not opportunity cost; the forgone alternative is.