1.4 Choice, opportunity cost and efficiency in resource allocation

Resource Allocation

The process of making choices regarding the distribution of scarce resources among competing areas of production.

Opportunity Cost

The cost and benefit of the next best alternative foregone when making an economic decision.

Relative Prices

The price level of a good or service in relation to that of another good or service, affecting resource allocation due to potential profits.

Production Possibility Frontier (PPF)

A graphical representation illustrating the different production options available for an economy.

Allocative Efficiency

Occurs when resources are used to produce goods and services that best satisfy society’s needs and wants.

Productive/Technical Efficiency

Producing goods and services at the lowest cost with minimal resource waste.

Dynamic Efficiency

The speed at which resources can be reallocated to meet changing consumer needs and choices.

Perfect Competition

A market structure with many buyers and sellers, perfect knowledge, price takers, strong competition, and easy entry and exit.

Monopolistic Competition

A market structure with a relatively small number of sellers, some market power, and a degree of product differentiation.

Oligopoly

A market structure with a small number of sellers, significant price-making power, and potential for collusion.

Monopoly

A market structure where only one seller controls the market, with no competition and the seller as the price maker.

Equilibrium Market Price

The price at which quantity demanded equals quantity supplied, ensuring market stability.

Price Elasticity of Demand (PED)

Measures the responsiveness of the quantity demanded to a change in price.

Price Elasticity of Supply (PES)

Measures how responsive sellers are to price changes in terms of quantity supplied.

Non-price Demand Factors

Factors that can shift the demand curve without changing prices, such as consumer income or preferences.

Expansion in Demand

Occurs when a price decrease leads to a movement downward along the demand curve, indicating increased demand.

Contraction in Supply

Occurs when there is a price fall, leading to reduced willingness of sellers to supply the product.