Homework 1

Explain the concept of opportunity cost using the above article. Use diagrams to explain what has happened to spending on the environment and how the extra money can be found to improve defence infrastructure.
[12 marks]

Opportunity cost is the cost of the next best alternative which is foregone when a choice is made.

In this case a choice has been made to spend less on areas covered by DEFRA, presumably so that other departments do not have to suffer budget cuts because the Government has less money to spend on public services as a whole. For example, DEFRA has been run on £500M less between 2010 and the present and must save a further £300M. This would mean that the NHS budget, for instance, would not have to be cut. Although DEFRA provides a service and not a product, these changes can still be shown on a PPF diagram such as the one below. Production possibility frontiers show the maximum quantities of different combinations of output of two products, given current resources and the state of technology:

DEFRA
DEFRA

A

B
A

B

Spending has reduced from point A to point B on the PPF, whilst spending on the NHS, for example, has not altered. Consequently, the maximum output of DEFRA has reduced, whereas that of the NHS has not.
Spending has reduced from point A to point B on the PPF, whilst spending on the NHS, for example, has not altered. Consequently, the maximum output of DEFRA has reduced, whereas that of the NHS has not.

NHS
NHS

If the budget is reduced, fewer workers can be employed permanently. This means that the work that is yet to be done on other projects has to be subcontracted to private sector workers. The transfer of resources can be shown on a PPF thus:
Public
Sector
Public
Sector

A B
A
B

Spending has reduced from point A to point B on the PPF, whilst spending on the resources