2281 · 1.3
Opportunity cost flashcards
Revision flashcards for Cambridge 2281 Opportunity cost (syllabus 1.3). Flip, recall, then mark a real past-paper question.
Card
What is the basic economic problem?
The problem of scarcity, which arises because human wants are infinite, but the resources (factors of production) available to satisfy these wants are finite.
Card
Define opportunity cost.
The value of the next best alternative that is forgone when an economic decision is made.
Card
List the four factors of production and their respective rewards.
Land (reward: rent), Labour (reward: wages), Capital (reward: interest), and Enterprise (reward: profit).
Card
Distinguish between an 'economic good' and a 'free good'.
An economic good is scarce and has an opportunity cost in its production (e.g., a car). A free good is not scarce and has a zero opportunity cost (e.g., air to breathe).
Card
Why does scarcity necessitate choice?
Because resources are limited, not all wants can be satisfied simultaneously. Therefore, economic agents must choose which wants to satisfy and which to leave unsatisfied, leading to trade-offs and opportunity costs.
Card
What is meant by 'rational economic decision-making'?
The assumption that economic agents (individuals, firms, governments) make choices to maximise their own welfare (utility, profit, or social welfare) by comparing the benefits of an action against its opportunity cost.
Card
Provide an example of opportunity cost for a firm.
A car manufacturer uses its factory and resources to produce 1,000 saloon cars. The opportunity cost is the profit it could have earned from producing 800 SUVs instead, if that was the next best alternative use of its resources.
Card
What are the three basic economic questions?
1. **What to produce?** (Which goods and services should be made?) 2. **How to produce?** (What combination of factors should be used?) 3. **For whom to produce?** (Who will receive the goods and services?)