Opportunity cost

the opportunity cost can be defined as the foregone cost of a good in order to attain another good, for example if a customer foregoes one orange in order to buy two bananas then the opportunity cost of buying two bananas is one orange.


Utility in economics can be defined as the measure of satisfaction the customer derives from consuming a good or service, utility is therefore a measure that depicts the level of satisfaction by consumers.

Minimum efficient scale

The minimum efficient scale can be defined as the minimum units of output that a firm or organisation can produce in order to achieve minimum long run average cost, therefore it is the point at which the firm can produce minimum units and make a profit in the long run.



Sunk cost

Sunk costs are the costs that an organisation or a firm has already incurred and paid for and they are not possible to recover, therefore these costs are those costs that are already incurred and they are not recovered in any way.

b. Distinguish between allocative and productive efficiency.

Productive efficiency refers to the efforts a firm makes in order to reduce the cost of production of a good or service, this requires that the firm observes the cost of production curves to determine the level of output and input that is optimal tin order to attain efficiency in production.

Allocative efficiency refers to pricing of final goods in such a way that consumers will be willing to pay for a certain cost due to the utility they attain from that good. Therefore in short we can say that the allocative efficiency involves the final prices of goods with the aim of satisfying the consumer while productive efficiency involves the production process and ways in which to reduce the cost of production.


a. production-possibility



The production possibility frontier



(1) On the frontier

Point B on the diagram above shows a point on the frontier, at this point we have the utilisation of all the resource of production and there are no idle resources, therefore this point is an optimal point of production.

(2) Inside

The point A on the diagram above shows the point inside the possibility frontier, this point shows lots of idle resources and it is not an optimal point of production since it is inside the production possibility frontier.



b. trade and change in consumption

International trade is a source of goods that a country does not produce, therefore when there is international trade there is a variety of goods available in the market. The other possibility is that there is an increased market size, there is an expansion of market when there is trade and countries can sell their excess production to other countries and this increases per capita income. The other possibility is that countries will specialise in the means of production they have comparative advantage in, through this way they will specialise and there will be a reduction in final prices and at the same time quality.

Therefore when there is trade then the country will experience a change in the consumption possibility, this is due to the availability of a variety of goods, goods become cheaper due to specialisation and the increased per capita income increasing consumption and demand for goods and services as a result of increased exports increasing income.

3. Market for natural gas.


Neither demand nor supply change



2. A large tax imposed

Supply decreases

3. Income rises

When income rises then the demand increases

4. Market for ground turkey meat.

1. Price of grain drops

Supply increase



2.  Price of beef drops

Demand decreases

3. Expected price of turkey to drop

Demand decreases


a. complements

Complementary goods are those goods that are used together in consumption example are a car and petroleum.



b. division of labour

Division of labour will increase the output per labour because of the following reasons

– Specialisation – this results from the increased division of labour where there is specialisation resulting into better efficiency

– Productivity – Increases productivity because training time is reduced and the worker is productive in a short amount of time.

– Increased skills – Labourers become more skilful because of working on one task repeatedly.

– The time spent moving from one tasks to another is reduced therefore reduces time wastage.


a. accounting profit and economic profit

There is a difference in accounting and economic costs, accounting costs are derived from the sales minus costs of production.

Economic profits have a different view, normal profits are realised when the total revenue equals total costs, economic profits is realised when then total revenue exceeds total costs.

b. fixed cost and variable cost



Variable costs are those cost that vary with the changes in the variables of production, when we increase the variable input then the variable costs increases example labour costs

Fixed costs are those costs that are fixed per month in a firm, this include such costs as rent

c. For each of the following, indicate if it is generally a fixed cost or generally

a variable cost:

(1) Insurance premiums;

Fixed cost

(2) Shipping charges;

Variable cost



(3) Wages;

Variable cost

(4) Interest on company-issued bonds;

Variable cost

(5) Real estate taxes.

Fixed cost


a. spill over cost and spill over benefit

spill over costs and spill over benefits can be referred to as positive or negative externalities, spill over benefits are the unpaid for benefits to the consumer an example is the case where a neighbour plays music and the person next door listens to the music and benefits without paying anything.



Spill over costs are costs that are incurred s a result of external factors example in the case of round noise made by an industry is a spill over cost to residents of the area.

b. public goods

A public good are those goods provided by the government and they are the consumption of these goods is not paid for directly, an example is roads, bridges that are provided by the government.

8. Define economies of scale and give three reasons why they may exist.

Economies of scale can be defined as the decline in the average cost of production as the level of output increases, economies of scale exists due to the following reasons:

– The output increase will result into a distribution of fixed costs into ore units and therefore the average cost decreases.

– As output increases then the fir reduces its costs including the variable costs

– The fixed costs of production per unit decreases




1 D

2 A

3 D

4 B

5 A

6 B

7 D

8 A

9 A

10 A

11 A

12 B



13 C

14 B

15 A


Philip Hardwick (2004) Introduction to Modern Economics, Pearson Education Press, UK