Unit 1 Markets

Humans have unlimited wants i.e. they are never satisfied but resources needed to create goods and services are limited. This means that humans have to make choices about what to produce and consume using the scarce resources. These choices involve costs = opportunity costs.

Opportunity cost = benefit given up by not choosing the next best alternative e.g. the opportunity cost of building a motorway is what could have been produced using the resources used to build the motorway.

Resources = factors of production

Land = natural resources of planet

Labour = humans as workers

Capital = anything created by humans to help produce goods and services e.g. tools

Enterprise = humans as risk takers and organisers of production lt;/p>

Production possibility frontier = PPF

PPF = graph showing all the maximum combinations of goods and services that an economy can produce with a given level of resources and a given level of productivity.

Opportunity cost and the PPF

Since the PPF shows all the maximum combinations possible deciding to switch from one combination to another involves an opportunity cost. This is shown below. It is only possible to get AB more of good X by giving up CD of good Z. The opportunity cost of switching from combination 1 to combination 2 is thus CD of good Z.