Introduction to IB Economics

Factors of Production

Resources or as they are sometimes referred to as "Factors of Production" are generally scarce, although some goods which are not scarce such as sea water and air are referred to as free goods. Free goods have no "opportunity cost (see below). We group resources into 4 distinct groupings:

• Land

• Labour

• Capital

• Entrepreneurship.

Now make notes on the 4 Factors of Production from Tragakes P 3-4

Now watch this video and test your knowledge and understanding. (Flash required)

FOP Video 

Once you have finished watching the video open  "intro concepts" and copy out the definitions for the four factors of production. In addition your homework when we complete this introductory unit is to read this PDF and if there is anything that you don't understand you must ask for help.

Opportunity Cost

Because resources are scarce we have to make choices and we have to give up things. This leads to the concept of opportunity cost

Opportunity cost measures the cost of any economic choice in terms of the next best alternative foregone

Many examples of opportunity cost exist at the level of the individual, the household, the firm, the government and the economy:

• The opportunity cost of deciding not to work is the lost wages foregone

• The opportunity cost of spending money on a foreign holiday is the lost opportunity to buy a new dishwasher or the chance to enjoy two short breaks inside the United Kingdom

• The opportunity cost of the government spending £20 billion on interest payments on the national debt is the extra money it might have allocated to the National Health Service

• The opportunity cost of an economy investing its resources in new capital goods is the current production of consumer goods that is given up

• The opportunity cost of using arable farm land to produce wheat is that the land cannot be used in that production period to harvest potatoes

Student Activities on Opportunity cost

here is an activity for you to identify the different opportunity costs stakeholders have through making choices.

For a fuller explanation and further notes your task now is to go to

//tutor2u.net/economics/revision-notes/as-markets-scarcity-and-choice.html

Opportunity costs and PPFs

Production possibility curves ( production possibility frontier)

The PPC/F illustrates the concepts of choice and opportunity cost. If we assume that a country only produces food and clothing, and that country wishes to produce more clothes, then it would have to sacrifice the production of some food. It is this sacrifice of food that is the opportunity cost of the extra clothing.

How to construct a PPC:

Assumptions: we have 5 workers, producing food and clothing. How we allocate these workers will determine how much of each good we produce. eg

5 People producing food: 20 units of food; 0 clothes

4 people producing food: 16 food; 2 clothes

3 people producing food 12 Food 4 clothes

etc etc

Draw a PPC (you'll need graph paper)

From this it is easy to show the opportunity cost of producing more food (or more clothing)

Note that in this simple example opportunity cost is fixed. Do you think that this is realistic and if not why?

A more realistic model is shown below, but this only has 4 workers

Worker 1 is very good at cooking but not so good at sewing so produces 10 units of food or 2 units of clothing

Worker 2 can produce 8 food or 4 clothes

Worker 3 is equally good at both so they produce 6 food or 6 clothes

Worker 4 is great at sewing but a lousy cook so produces 2 units of food or 10 units of clothes.

If all 4 workers are initially producing food, which would you transfer first to producing clothes?

Now draw the PPC. What is happening to opportunity cost as you move along the PPC?

Now download and read this word document 

Now complete this worksheet

Extension Activities:

• Along came Polly what is the opportunity cost involved here?

And for those of you who missed the lesson, or require a little extra help here is a link to a revision video on opportunity cost.

Economic Systems-Introductory Video