The Opportunity Cost

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Explain the concept of opportunity cost

Opportunity Cost is when in making a decision the value of the best alternative is lost. e.g. choosing electricity over gas, the opportunity cost is what you’ve lost from not picking gas. Firms take decision about what economic activity they want to be involved in. Governments also have to make this important choice like deciding to devote more resources to the NHS would mean that those resources weren’t spent in other sectors like defense. Economic analysis helps explain how choices are made and how they could be improved.

Explain what is meant by a ‘trade-off’

Choosing more of one thing which can only be achieved by giving up something else in exchange.

Explain what is meant by a production possibility curve/frontier (PPC/F)

Explain the factors causing a PPC/F to shift

Explain how PPC/F can be used to illustrate scarcity, choice, opportunity cost and productive efficiency

Evaluate the usefulness of the concept of opportunity cost.

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