SSE 104: Introduction to Macroeconomics
Chapter 2: Subjective Assignment
Opportunity cost is the cost given up in order to obtain something else. In question one, for example, the opportunity cost of increasing mobile phones from 500 to 900 is 2,000 pizzas. This is because we need to decrease (give up) 2,000 pizzas in order to produce 400 extra mobile phones. Similarly, if we went the other way around, the opportunity cost of increasing the number of pizzas from 8,000 to 10,000 comes at the cost of 200 mobile phones which would be the opportunity cost.
The production possibility frontier is a curve that shows how much of two goods or services can be produced. It reveals the possible outcomes of how efficient two goods can be. An efficient point refers to the point where resources are being used at the most optimal level. Likewise, the inefficient point is the point where resources are not being used to their full potential. Points that are outside the production possibility frontier are desirable, but are unattainable because of the lack of resources available.
Positive statements are statements that can be proven regarding the data obtained. For instance, one can say that two efficient points on the graph in question 2 are points R and U. This is true because we can look at the graph and verify that based on this information the statement is accurate. On the other hand, a normative statement is a judgment of value or an opinion. A good example of this would be a statement such as, the government should increase social security benefits by 10%. There is no data backing the efficiency of said statement, but it can hold value with the public because of the importance of social security for many people.
The circular flow diagram shows us how the economy works. It graphs how resources and goods interact with one another. In section A of the graph is where we have our households or individuals. In section B is where businesses or firms are located. Section 1 refers to the market factor of production while section 2 is the product market of goods and services. All of these sections interact with one another in many ways. If an individual needs a job, for instance, they become a labor resource. A particular business can then hire them and the individual can produce goods or services for said business. Since the individual has an income from the business that hired them, they can become consumers of other goods and services which generates income for a business which in turn allows them to buy more resources from the market factor of production.