With the aid of diagrams, illustrate how one can use the Production Possibility Frontier (PPF) to explain the economic concepts of scarcity, choice and opportunity cost.
The fundamental economic problem faced by every nation is that resources are never found in sufficient quantities to produce and provide goods and services that satisfy the nation’s unlimited needs and wants. Although resources are limited, human wants are infinite and this gives rise to scarcity. Scarcity simply reveals that the demand for something is much greater than the supply, or there is not enough money to buy it. Mabry-Ulbrich (1994) and Hyman (1991) defined scarcity as the imbalance between human desires and the means of satisfying these desires. The means of satisfying human needs and wants are sufficient resources which will never be sufficient though. Resources are known in economics as the factors of production and they include land, labour, capital and entrepreneurship, which are everything it takes to produce goods and services required by people and firms in a performing economy. These resources will never be enough to satisfy human needs and wants.
Since resources are finite, choices have to be made of what goods and services to produce from at least two alternative possibilities e.g. motor vehicles and cereals. The concept of choice derives from scarcity and inherent limited resources endowment of a nation. Choice also determines consumer buying behavior as limited income informs the consumers’ choices or alternatives. The study of the concept of choice assumes that people are rational and want to maximise limited resources. There is however some irrational decision making that consumers make arising from addiction, habits, show off and idolism that seems to contradict the concept based on the next best alternative.
Under scarce resources choices are made at a cost of sacrificing the next best alternative in order to attain the best option. This cost as propounded by Mabry-Ulbrich (1994), Case et al (2009) and Samuelson-Nordhaus (2010) is termed opportunity cost. Their assertion was acknowledged by N Gregory Mankiw (2003) who described opportunity cost as a benefit, profit or value of whatever must be given up to obtain some item. It follows that the cost of selecting to use a resource for one purpose is measured by the next best alternative for using the resource as alluded to by Mabry-Ulbrich (1994) and Hyman (1991). However the use of resources to produce the goods and services must be efficient as resources are not enough to satisfy all the human needs and wants.
When an economy makes the best use of its limited resources to satisfy the unlimited needs and wants of its people it is deemed to be efficient. According to Samuelson-Nordhaus (2010) productive efficiency is attained when the economy produces the highest possible output of one good while keeping the outputs of all other goods unchanged. The definition by these authours posits that people utilise the available resources so that they can gain the greatest possible benefit or satisfaction and the best alternative among the available options. Humans make assumptions that decision makers choose rationally namely to choose the production alternative leading to sufficient benefit and satisfaction based on the availed information.
The concept of scarcity, choice and opportunity cost calls for national decision makers to understand economics. The decision of what a nation has to produce between two alternative possibilities is not arrived at through wishful thinking but by the use of a well thought out economic model or graph referred to as the Production Possibility Frontier (PPF), Production Possibility Curve (PPC) or Production Possibility Boundary (PPB). As the name suggests, production refers to the output of goods and services, possibility refers to the maximum attainable amount whilst a boundary/ curve or frontier points to a resource limitation. The major questions requiring answers include the amount of goods to be produced in order to produce them in the most efficient way. For example how many metric tonnes of cereals and beef should Zimbabwe produce to be most efficient? That is the gist of employing the production possibilities models such as the PPF. The production possibilities model is premised on three important assumptions which are firstly, that resources are to be used to maximum capacity, secondly that resources are scarce and lastly that technology remains constant. Therefore production is to be based on a choice between two alternative goods/ services (choice) and the need for efficiency brought about by the calculation of opportunity cost
The PPF shows the frontier (limitation) of what is possible and is used in economics as an illustration to show the choices facing all countries in producing goods which use limited factors of production. The PPF focuses on national decision making given limited resources. It shows the different combinations of goods and services that can be produced with a given amount of resources. It also shows unattainable or no ideal point on the curve from the given resources. It illustrates that any point inside the curve suggests that resources are not being utilised effectively and it thus reflects inefficiency.
. With the aid of the PPF graph, Figure 1 below, the paper will unpack the concepts of scarcity, choice and opportunity cost as they are used to decide the efficient production of goods and services to address unlimited human wants and needs. The illustration will use the production of patrol boots and beef as the two best alternative production possibilities available to country X. As with all PPC graphs the following assumptions have been taken on board viz that resources are used to maximise capacity, that resources are scarce and that technology remains completely constant.
y0 6 A
y1 5 E C
Patrol Boots 4
y2 3 B
y3 2 D
0 1 2 3 4 5 6 X
x0 x3 x1 x2
Beef (10 000 tonnes)
Figure 1: PPF Graph Illustrating the Concept of Scarcity, Choice and Opportunity Cost.
The graph depicts, scarcity as shown by the concave arc from the Y axis to the X axis i.e. curve YAEBX. Any point inside and along the curve/ frontier shows that production is attainable and is within the resources available to Country X. Any point outside the frontier or curve e.g. point C is desirable but unattainable as the production possibility is outside the availed resources. Due to scarce resources Country X has to decide the amount of patrol boots and beef it has to produce to satisfy its needs.
There are a number of options Country X may take. These options are for example to produce six thousand units of patrol boots and zero tonnes of beef. This choice will be said to be efficient as resources are used to maximise capacity. However, in any country this type of production is not realistic and existent where you find people needing patrol boots only without the need of consuming the other good i.e. beef. It is from this assertion that the PPF does not touch or start at the Y axis line but from inside and downward. Country X may still be considered to be producing efficiently if it were to produce a combination of y0, y1, y2 and x0, x1 and x2 units of boots and beef respectively as long as the movement is along the curve. The difference of y0 and y1, y1 and y2 to produce x0, x1 and x2 or vice versa is the opportunity cost, which is defined by Samuelson-Nordhaus (2010) as the benefit of the second best alternative forgone when making the best choice of either producing boots or beef. It is shown by the negative slope of the PPF which reflects that an increase in the production of one good will lead to a decrease in the production of the other good.
However, there are circumstances in which Country X may decide to produce y3 units of boots and x3 units of beef and the movement will be inside the curve as shown at D. The resources are available but are under utilised and thus contravening the important assumption of maximum utilisation of resources. This kind of production is called inefficiency and falls within the curve. The situation in Country X can be likened to Zimbabwe whose PPF is wide because of a rich mineral and agricultural resource base but its economy is underperforming. The production levels fell to around 20 %, whilst unemployment levels were estimated to be 95% and the country continues to rely on imports for basic goods. This is probably attributable to issues to do with corruption on the one hand and sanctions on the other hand. Another example is of the United States of America (USA) during the Great Depression. The Great Depression period was characterized by high unemployment levels and extremely low production. The advent of World War Two (WWII) extricated the USA economy from inefficient performance as production levels began to rise and their economy moved from inside to the boundary but could not go outside the curve then. It is clear from Figure 1 that the PPF whether it is showing two specific goods of either type, or consumer and capital good, a picture of production output possibilities is shown.
The major aim in any economy is achieving growth. An increase or decrease in the growth of any economy will affect the curve by shifting it outwards or inwards as shown at Figure 2. When the curve shifts outwards or to the right, it is a reflection of growth while a shift inwards or to the left points to a reduction in output. An outward shift is caused by the growth of the economy with all other things remaining constant. Shifts in the curve are occasioned by changes in technological advances such as the employment of new and advanced machinery or change in labour force. It can also be shifted by the changes in resources such as the discovery of minerals or oil but may also be by the exhaustion of such resources. Some shifts are due to the empowerment or non empowerment of the human capital base through more educational and training programmes or non existence of such programmes.
The shift outwards or inwards of the curve reflects the performance of the economy as increasing or decreasing. Apart from the shifts there can be movements along the curve which shows a change in tests and preferences caused by technological advancements and campaigning as shown at Figure 3. For example the advent of smart phones and tablets has diverted society from liking products from print publications to liking those from digital publications. Similarly health living campaigns have resulted in changes in tastes and preferences by society from inorganic i.e. genetically modified foodstuffs (GMFs) to organic foods such as road runners and other traditional cereals and beverages.
Figure 2: Illustration of outward and inward shifts in PPF
Figure 3: Illustration of movement along PPF
The PPF graph is a very efficient model in assisting nations to produce efficiently for their economies. It shows the limitations imposed by the scarce resources against unlimited human wants and the application of the concept of opportunity costs to bring and ideal production possibility able to address satisfaction issues by the society. The concept of choice assumes that people are capable of choosing rationally although it may not be the case with those with addiction, customary beliefs and appetite for show off. The choice of what goods to produce against the infinite wants arises from understanding what next best alternative to forgo to have the best option. The graph also shows the inefficient levels if a country decides to operate inside the curve rather than along. Outward and inward shifts may occur in the event of changes in technological advancement, changes in resources, labour forces and when better educational programmes are introduced i.e. expansion of the human capital base. Overall the PPF/C/B is the most ideal model a country may use to understand the concept of scarcity, choice and opportunity cost.
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Tucker, Jeffrey, Kinsella, Stphan (2010) Goods, Scarce and Nonscarce Retrived on 19 July 2018.