Nathan Millet Economics 2018/2019
ECONOMICS
A-Level
Theme 1
- Nathan Millet -
1
,Nathan Millet Economics 2018/2019
Opportunity Cost:
Opportunity Cost (OC) is the next best alternative foregone
This means that when ever you make a decision there will be sacrifices.All economic
agents (producers, consumers and government) will experience opportunity cost. All
economic agents seem to have the absolute lowest Opportunity Cost. The lower the
Opportunity Cost the less you have to sacrifice in order to have your chosen option.
A high Opportunity Cost means that in order to consume/produce your chosen option you
will have to sacrifice a large amount on alternatives.
Opportunity Cost for the consumer is anything they could have consumed instead of their
chosen consumption eg. i can either buy an iPhone or a pair of trainers.
Opportunity Cost for the producer is both what the producer could have made as a unit of
output had they not have chosen the current choice of output and also the profit which they
could have earned from the alternative eg. if the producer allocate their wood to make a
table for £100 the Opportunity Cost could be a wardrobe which would have earned
£200, ,therefore the Opportunity Cost in this instance is £100 (200-100=100).
Opportunity Cost for the government is anything they could have spent public money on
and the benefit they could have received eg. if the government allocated £1Billion to build
a new bridge the Opportunity Cost could have been 5 new hospitals.
Opportunity Cost comes from having scarcity in the economy. Because we don't have
enough resources to produce all types of output it means that we must sacrifice the
production of some output in order to produce other outputs. Therefore the worse an
economy's level of scarcity is the worse their Opportunity Costs will be in the economy.
In the exam you must be able to clearly illustrate Opportunity Cost on a diagram and
2
,Nathan Millet Economics 2018/2019
discuss the idea of marginality.
A Marginal Analysis looks at the additional effect from producing/consuming an additional
unit of output, this can be in terms of costs and or benefits eg. if the 10th unit sold for £3
and the 11th unit sold for £5 then the marginal cost between the 10th and 11th good is £3.
The diagram below illustrates movements and shifts along a Production Possibility frontier
(PPF). It is on a PPF that we can illustrate Opportunity Cost.
Capital Good = Output which makes other types of output. This can include capital
machinery, such as robots and also money which is invested into other products.
Consumer Goods = Output for final consumption. eg. a cinema ticket or mobile phone.
PPF 1 = The Production Possibility Frontier. This represents the maximum production
capacity of an economy when all the economies resources are fully employed. If an
economy is operating along their PPF curve it means that there are no resources left over
in the economy instead, all resources have been fully employed and are being used to the
absolute maximum efficiency.
An economy can only ever operate at one point on/within their PPF curve. You can not
operate at more than one position. In reality, no economy will ever completely operate
along their PPF curve but many economies can get close to it.
A = The economy allocating their resources to produce 10 million capital goods and 11
million consumer goods. We remember that because point A is along the PPF curve all
resources have been employed in the economy to their maximum efficient level.
A B = This represents a movement on the PPF curve. This illustrates a reallocation
of resources around the economy which now produces 9 million capital goods and 14
million consumer goods. We know that there were no spare resources at point A, and
therefore moving to B has meant taking resources away from one area of the economy, in
this case capital goods, and reallocating them to produce consumer goods.
When a movement along the PFF curve occurs we must be able to show where and why
Opportunity Cost occurs. When we move from A to B we lose 1 million units of capital
goods, but gain 3 million units of consumer goods. The Opportunity Cost is therefore the 1
million units of capital goods. We can suggest that there is an Opportunity Cost ratio of
1:3, for every 1 million goods of capital goods lost, there is an additional 3 million units of
consumer goods gained. The Opportunity Cost has occurred because there were no
scarce resources available, therefore resources had to be taken away from one area of the
economy and devoted to another.
X = Under capacity utilisation. If an economy is operating anywhere below their PPF curve
it means that they are not utilising all of their resources correctly. They have unemployed
resources EG wood labour etc. not being used for production and therefore going to
waste. The further you are way from your PPF curve the more inefficient your economy is.
X Y = This illustrates the economy moving closer to PPF curve and therefore, using
more of the economies resources. When you move within the PPF curve there is no
3
, Nathan Millet Economics 2018/2019
opportunity cost as you are simply using more of the resources which have been staying
idle around the economy.
Z = Beyond the capabilities of the economy. This simply means that the economy can not
operate at this point because they do not have the resources/production ability to do so.
PPF 2 = A rightward shift in the production potential of the economy. Went this occurs it
the economy can produce more because there has been increase in one of the factors
which causes a right ward shift in the PPF curve. A rightward shift in the PPF curve does
not mean that in the economy can increase the amount of output which they can produce.
PPF 3 = Leftward shift in the PPF curve. This shows that an economy has shrunk and
therefore can produce less total output that before. When this occurs it means the
maximum production potential of the economy has been reduces. A leftward shift in the
PPF curve occurs as a result of one of the factors which cause a leftward shift occurring.
Homework 1,2,3
1) Improvement of technology, meaning more efficiency - Increase in amount of shared
resources. If 10 people are working on a product and 5 more people now join, then they
can help produce even more than we're capable of right now. - Adding another facility to
make more items.
2) In a war, eg a lot of people are lost, capital can be destroyed.
3) Adam Smith = A Scottish philosopher and economist who is best known as the author of
An Inquiry into the Nature and Causes of the Wealth Of Nations (1776), one of the most
influential books ever written. Also known for his theory of compensating wage
differentials, meaning that dangerous or undesirable jobs tend to pay higher wages to
attract workers to these position.
Specialisation and Division of Labour
Specialisation refers to any of the following:
1. Concentrating your production on a narrow focus of output eg. overproducing black
paint instead of any colour of paint. An entire economy can specialise their output to one
area of production eg. Saudi-Arabia specialises in oil production.
2. A firm/industry could specialise in a specific part or component of an overall piece of
output eg. a firm could make just the screen for iPhones.
3. Your work force could specialise in doing single specialised tasks within an overall
production process.
Division of labour (DOL) is when a production process is broken down into simple tasks
and the labour force is divided up to perform a task within the production process.
The overall aim of both specialisation and DOL is to make the firm more efficient, more
productive and produce their output with a lower Opportunity Cost. Therefore they are able
to make more goods with less inputs or use less inputs and make more output . This will
ultimately lower the firms cost of production, give the firm more to sell resulting in the firm
being more competitive, and earning more profit.
4
ECONOMICS
A-Level
Theme 1
- Nathan Millet -
1
,Nathan Millet Economics 2018/2019
Opportunity Cost:
Opportunity Cost (OC) is the next best alternative foregone
This means that when ever you make a decision there will be sacrifices.All economic
agents (producers, consumers and government) will experience opportunity cost. All
economic agents seem to have the absolute lowest Opportunity Cost. The lower the
Opportunity Cost the less you have to sacrifice in order to have your chosen option.
A high Opportunity Cost means that in order to consume/produce your chosen option you
will have to sacrifice a large amount on alternatives.
Opportunity Cost for the consumer is anything they could have consumed instead of their
chosen consumption eg. i can either buy an iPhone or a pair of trainers.
Opportunity Cost for the producer is both what the producer could have made as a unit of
output had they not have chosen the current choice of output and also the profit which they
could have earned from the alternative eg. if the producer allocate their wood to make a
table for £100 the Opportunity Cost could be a wardrobe which would have earned
£200, ,therefore the Opportunity Cost in this instance is £100 (200-100=100).
Opportunity Cost for the government is anything they could have spent public money on
and the benefit they could have received eg. if the government allocated £1Billion to build
a new bridge the Opportunity Cost could have been 5 new hospitals.
Opportunity Cost comes from having scarcity in the economy. Because we don't have
enough resources to produce all types of output it means that we must sacrifice the
production of some output in order to produce other outputs. Therefore the worse an
economy's level of scarcity is the worse their Opportunity Costs will be in the economy.
In the exam you must be able to clearly illustrate Opportunity Cost on a diagram and
2
,Nathan Millet Economics 2018/2019
discuss the idea of marginality.
A Marginal Analysis looks at the additional effect from producing/consuming an additional
unit of output, this can be in terms of costs and or benefits eg. if the 10th unit sold for £3
and the 11th unit sold for £5 then the marginal cost between the 10th and 11th good is £3.
The diagram below illustrates movements and shifts along a Production Possibility frontier
(PPF). It is on a PPF that we can illustrate Opportunity Cost.
Capital Good = Output which makes other types of output. This can include capital
machinery, such as robots and also money which is invested into other products.
Consumer Goods = Output for final consumption. eg. a cinema ticket or mobile phone.
PPF 1 = The Production Possibility Frontier. This represents the maximum production
capacity of an economy when all the economies resources are fully employed. If an
economy is operating along their PPF curve it means that there are no resources left over
in the economy instead, all resources have been fully employed and are being used to the
absolute maximum efficiency.
An economy can only ever operate at one point on/within their PPF curve. You can not
operate at more than one position. In reality, no economy will ever completely operate
along their PPF curve but many economies can get close to it.
A = The economy allocating their resources to produce 10 million capital goods and 11
million consumer goods. We remember that because point A is along the PPF curve all
resources have been employed in the economy to their maximum efficient level.
A B = This represents a movement on the PPF curve. This illustrates a reallocation
of resources around the economy which now produces 9 million capital goods and 14
million consumer goods. We know that there were no spare resources at point A, and
therefore moving to B has meant taking resources away from one area of the economy, in
this case capital goods, and reallocating them to produce consumer goods.
When a movement along the PFF curve occurs we must be able to show where and why
Opportunity Cost occurs. When we move from A to B we lose 1 million units of capital
goods, but gain 3 million units of consumer goods. The Opportunity Cost is therefore the 1
million units of capital goods. We can suggest that there is an Opportunity Cost ratio of
1:3, for every 1 million goods of capital goods lost, there is an additional 3 million units of
consumer goods gained. The Opportunity Cost has occurred because there were no
scarce resources available, therefore resources had to be taken away from one area of the
economy and devoted to another.
X = Under capacity utilisation. If an economy is operating anywhere below their PPF curve
it means that they are not utilising all of their resources correctly. They have unemployed
resources EG wood labour etc. not being used for production and therefore going to
waste. The further you are way from your PPF curve the more inefficient your economy is.
X Y = This illustrates the economy moving closer to PPF curve and therefore, using
more of the economies resources. When you move within the PPF curve there is no
3
, Nathan Millet Economics 2018/2019
opportunity cost as you are simply using more of the resources which have been staying
idle around the economy.
Z = Beyond the capabilities of the economy. This simply means that the economy can not
operate at this point because they do not have the resources/production ability to do so.
PPF 2 = A rightward shift in the production potential of the economy. Went this occurs it
the economy can produce more because there has been increase in one of the factors
which causes a right ward shift in the PPF curve. A rightward shift in the PPF curve does
not mean that in the economy can increase the amount of output which they can produce.
PPF 3 = Leftward shift in the PPF curve. This shows that an economy has shrunk and
therefore can produce less total output that before. When this occurs it means the
maximum production potential of the economy has been reduces. A leftward shift in the
PPF curve occurs as a result of one of the factors which cause a leftward shift occurring.
Homework 1,2,3
1) Improvement of technology, meaning more efficiency - Increase in amount of shared
resources. If 10 people are working on a product and 5 more people now join, then they
can help produce even more than we're capable of right now. - Adding another facility to
make more items.
2) In a war, eg a lot of people are lost, capital can be destroyed.
3) Adam Smith = A Scottish philosopher and economist who is best known as the author of
An Inquiry into the Nature and Causes of the Wealth Of Nations (1776), one of the most
influential books ever written. Also known for his theory of compensating wage
differentials, meaning that dangerous or undesirable jobs tend to pay higher wages to
attract workers to these position.
Specialisation and Division of Labour
Specialisation refers to any of the following:
1. Concentrating your production on a narrow focus of output eg. overproducing black
paint instead of any colour of paint. An entire economy can specialise their output to one
area of production eg. Saudi-Arabia specialises in oil production.
2. A firm/industry could specialise in a specific part or component of an overall piece of
output eg. a firm could make just the screen for iPhones.
3. Your work force could specialise in doing single specialised tasks within an overall
production process.
Division of labour (DOL) is when a production process is broken down into simple tasks
and the labour force is divided up to perform a task within the production process.
The overall aim of both specialisation and DOL is to make the firm more efficient, more
productive and produce their output with a lower Opportunity Cost. Therefore they are able
to make more goods with less inputs or use less inputs and make more output . This will
ultimately lower the firms cost of production, give the firm more to sell resulting in the firm
being more competitive, and earning more profit.
4
