Guided Solutions: Topic 1 Introduction

Tutorial Essay Question

“Using a production possibility frontier (PPF) diagram, explain the concepts of scarcity,
choice and opportunity cost.

Evaluate whether an outward shift of the PPF always leads to an improvement in

allocative efficiency.”

Step 1: Understand the task

The question has two parts:

Explain (scarcity, choice, opportunity cost) using the PPF.

Evaluate whether an outward shift always improves allocative efficiency.

Students must draw and label a PPF diagram — this is essential.

Step 2: First part – Explain scarcity, choice, opportunity cost

Scarcity:
Resources are limited (labour, land, capital).

The PPF shows the maximum possible output combinations given those resources.

Anything outside the curve is unattainable → scarcity constraint.

Choice:
Points on the PPF show the trade-offs between two goods.

Moving along the curve means choosing more of one good, less of another.

Opportunity cost:
Illustrated by the downward slope of the PPF.

The opportunity cost of producing more of one good is the amount of the other good
foregone.

Concavity of the PPF shows increasing opportunity cost (resources not equally suited).

Diagram: Draw a concave PPF, label points (suggestion from me but you can use your
own indicators, A, D, F, G on curve; B inside curve; E outside).

Diagram 1: The Production Possibility Frontier

Step 3: Second part – Evaluate outward shift and allocative efficiency

Outward shift:
Represents economic growth — more resources, increase in skills or better
technology.

Maximum possible output increases (scarcity constraint relaxed).

Growth in Potential Output

Technology, Resources, Skills
Units of Running Content

Current PP

Future PPF

O
Units of I EA Content
Allocative efficiency:
Occurs when society produces the mix of goods most valued by consumers (where
willingness to pay = marginal cost).

Only one point on the PPF is allocatively efficient — depends on preferences (in the
lecture I did this by including an indifference curve – to be covered in topic 3).

ey evaluation point:
An outward shift increases productive potential (more output possible).

But it does not guarantee allocative efficiency — depends on whether the new
resources are used to produce what society wants.

Step 4: Bring it together in a conclusion

Outward shift = economic growth (reduces scarcity, more choice, potentially higher
living standards).

But allocative efficiency depends on distribution of resources and preferences.

So: outward shift can improve allocative efficiency, but not always.

Note:
Always draw and fully label the PPF diagram (scarcity, choice, opp. cost).

Use clear definitions in the intro (scarcity, choice, opportunity cost, allocative
efficiency).
Guided Solutions
Online Tutorial Questions

*Q . A student who has just graduated from college has three job offers: the first job
pays £35,000 a year, the second job pays £ 3,000 a year, and the third one pays
£ 5,000 a year.

What is the student's opportunity cost of taking the first job?

Answer
If the individual decides to take the first job, he will earn £35,000 a year. The
opportunity cost of taking this job is the next-best offer that he could have taken.
Therefore, the opportunity cost of the first job is £ 3,000 a year.

*Q . What are scarce resources? Why are economic agents concerned with the
allocation of these resources?

Answer: Scarce resources are resources for which the quantity that agents want
exceeds the quantity that is freely available. Economic agents need to satisfy their
unlimited wants in a world of limited resources. This makes it important for them to
understand how these scarce resources are to be used and distributed in order to
optimise allocation.

*Q3. Why do trade-offs occur? How are a household’s budget (also known as income)
constraint related to trade-offs?

Answer: Trade-offs occur because of scarcity–economic agents need to satisfy their

wants with limited resources.

Therefore, in most cases, some benefits have to be given up in order to gain other
benefits.

Budget constraints quantify the relevant trade-offs that an economic agent faces.

Once trade-offs are quantified, rational decision making becomes easier, allowing the
individual to make an optimal decision.

*Q4. Roberta is moving to be closer to her children. Roberta is a nurse and makes £45
per hour. She has to decide whether to hire movers to pack up her belongings or pack
it all up herself. The movers will charge £ ,000 to supply packing materials and pack
up all of Roberta's belongings. It would take 0 hours for her to pack up herself, and
she would need to spend £300 on packing materials.

(a). What is the total cost to Roberta of packing up herself?

A. £ 00
B. £900
C. £300
D. £ 000
Answer: A
Time cost (opportunity cost):
Roberta earns £45/hour.
If she spends 0 hours packing, she forgoes: 0 × £45 = £900

Packing materials: £300.

Total cost (self-packing): £ 900 + £300 = £ 00

(b). Which of the following statements is TRUE?

A. Roberta should not hire the movers as she will save £ 900.
B. Roberta should not hire the movers as she will save £ 000.
C. Roberta should hire the movers as she will save £300.
D. Roberta should hire the movers as she will save £ 00.

Answer: D
Option – Pack herself: £ 00
Option – Hire movers: Cost = £ 000 (materials + packing service)
Hiring movers saves her: £ 00−£ 000=£ 00

(c). What is Roberta's opportunity cost of packing up herself?

A. £300
B. £900
C. £ 000
D. £ 00

Answer: B
Roberta’s opportunity cost is the value of her next best alternative forgone — in this
case, the wages she gives up by spending 0 hours packing instead of working.
0 hours × £45/hour = £900
(Note: the £300 for packing materials is a direct cost, not an opportunity cost.)

(d). If Roberta found a 50% off coupon for the packing materials, how would that
change her optimal choice?

A. She would now save £50 by hiring the movers.

B. She would now save £700 by hiring the movers.
C. She would now save £50 by packing herself.
D. She would now save £700 by packing herself.

Answer: A
Original costs:
Packing herself = £900 (opportunity cost of time) + £300 materials = £ 00
Hiring movers = £ 000

With 50% off coupon on materials:

Materials = £300 × 0.5 = £ 50
Total self-pack = £900 + £ 50 = £ 050
Movers still = £ 000

Now the difference = £ 050 – £ 000 = £50

So with the coupon, packing herself costs £50 more than hiring movers.
She would now save £50 by hiring the movers.

Q6. Identify which statements are generally true of economic models.

Assign the word True or False to each row.

They simplify reality.

They describe reality.

They provide an explanation of the cause of certain economic phenomena.

They enable predictions of the 'if . . . then . . .' variety to be made.

They enable economists to make precise forecasts of the future state of the economy.

They can be tested by appealing to the facts.

Answer
They simplify reality. True
They describe reality. False
They provide an explanation of the cause of certain economic phenomena. True
They enable predictions of the 'if . . . then . . .' variety to be made. True
They enable economists to make precise forecasts of the future state of the economy.
False
They can be tested by appealing to the facts. True

Q7. What is a positive statement? What is a normative statement?

A positive statement is descriptive and fact-based. It explains what is, was, or will be,
and can be tested or verified against evidence.

What is a normative statement?

A normative statement is prescriptive and value-based. (optional - It expresses what

ought to be and involves value judgments, rather than testable facts).