Opportunity cost measures the cost of any choice in terms of the next best alternative forgone. For example, the opportunity cost of the government spending £10bn on the NHS, is decreased spending on other areas. Free market economy - this is when all goods and services are allocated through the price mechanism. This encourages businesses to be resourceful and rations goods and services based on who can pay for them. There is a limited role for the government and they are reduced to only protecting property rights.Planned/command economy - this is associated with a communist government. The government owns scarce resources and allocates these. They set production targets based on others wants and needs. Markets play no role in resource allocation. Mixed economy - some resources are owned by the public sector and some are owned by the private sector The public (state) sector supplies public goods, merit goods and corrects market failure. Most economies are mixed.
Economic resourcesLand - all natural physical resources e.g. farmland, climate, renewable energy.Labour - the human input into production e.g. the supply of workers available and their productivity. If a country wants to achieve growth on their PPF then they need inward migration. Capital - these are used to produce other consumer goods and services in the future. Fixed capital cannot be changed in the short run and includes machinery, equipment and technology. Free goods - have a zero opportunity cost. They use up no factor inputs when supplied.
Production possibility frontiers
A production possibility frontier shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed. When an economy as at a point inside the PPF then there are unemployed resources so the economy is inefficient. A point outside the PPF would be considered to be unattainable. For this a country needs economic growth - through increasing factor resources, increasing productivity. Reallocating resources would be an example of an opportunity cost. This is because if we increase the number of consumer goods then fewer resources are available to produce capital goods. A linear PPF can be drawn when the opportunity cost of producing either consumer of capital goods is constant.
The PPF will shift outwards when
There are improvements in productivity and efficiency from new technology or advances in the production process.
More factors of production are available and used due to an increase in the workforce or migration.
Discovery of new natural resources such as shale gas that are managed efficiently.
Innovation and technological advances which make natural resources more available.
The PPF will shift inwards when
There are damaging effects of severe natural resources such as a tsunami, floods and other extreme weather conditions.
Damage caused by war and other types of conflict
A brain drain of skilled workers out of a country.
A long term fall in productivity of labour
Value judgements - a person writing an article may include subjective statements about what they think ought to be or should be happening. They carry value judgements - they are trying to persuade you of the possible merits and demerits of a decision.Positive statements are objective statements that can be tested by using the available evidence - they have an objective explanation. E.g. a fall in incomes will lead to a rise in demand for own-label super market goods. Normative statements - are subjective statements that carry value judgements and subjective statements. E.g. unemployment is more harmful than inflation.
Specialisation and trade
Specialisation is when we concentrate on a product or task. This happens at all levels e.g. through the specialization of tasks within extended families, Bangladesh is the largest exporter of textiles. The aims of specialization are:
Higher output - workers become better at producing goods and services due to more practice. This leads to increased productivity.
Variety - consumers have access to a higher variety of higher-quality products.
A bigger market - specialization and trade increase the size of the market, so increases the ability of LRAC to be exploited (through economies of scale) leading to lower prices.
The division of labour raises output per person as people become better at their job through constantly repeating it. This raises output per person and so raises productivity.
There are limitations through the division of labour, however
Work becomes unrewarding and repetitive. This creates low motivation and absenteeism and so results in a lower productivity rate.
People may switch from boring, repetitive jobs to more less specialized jobs. This results in a high worker turnover for businesses. The UK has a worker turnover of 12% with those in low paid job moving jobs once every 12 months.
Some workers may be subject to structural unemployment because their skills will not be demanded in any other industry.
More standardized goods will lack variety.