With the aid of diagrams, illustrate how one can use the PPF to illustrate the economic concept of scarcity, choice and opportunity cost.
A Productive Possibility Frontier shows what a society could produce with existing resources at any moment in time. It shows the maximum output that a society can produce given its existing supplies of land, labour, capital and technical knowledge. Economists use the PPF to show the economic concept of scarcity, choice and opportunity cost. Scarcity leads to choice and choice leads to opportunity cost.
Scarcity is the excess of human wants resulting from having limited resources which are land, labour, capital and entrepreneurship. A society can only produce two types of goods which are consumer goods which directly satisfy our wants and capital goods which can be used to produce consumer goods. Societies must make difficult choices of what to produce in what quanties, how to produce and for whom to produce. The production possibility frontier concepts can explain how scarcity, choice and opportunity cost can be used as scarcity leads to choice and choice leads to opportunity cost.
When constructing the PPF there are three assumptions that must be satisfied if a company is to achieve attain a point along the PPF. Firstly, resources are assumed to be finite any moment in time thus labour, land and capital are fixed. It is also assumed that there is full and efficient utility of resources and the output of one product cannot be increased without decreasing the output of another. Lastly it is assumed that there is a given state of technology.
• D (unattainable)
The PPF graph above shows the combination for the production possibilities of two commodities with the same amount of resources used. The horizontal axis on the graph shows the quantities of product X while the vertical axis shows the quantities of product Y. The PPF shows that the same amount of resources are fairly distributed among the two products.
The PPF graph below illustrates that all resources are utilised efficiently on point B, C and D on the graph. When the economy is operating on the PPF line, it is efficient. All the points that is to the left side of the curve are said to be inefficiency. According to (Ryerson), an efficient point is one that lies on the production possibilities curve. At any such point, more of one good can be produced only by producing less of the other. The efficient points are those that lie on the production possibility curve marked B, C and D. Point X is desirable but unattainable. Opportunity cost is reflected by the concave nature of the PPF
Human needs exceeds the limited resources available, this results in scarcity. It is the situation where limited resources are insufficient to produce goods and services to satisfy unlimited human wants. Points that lie strictly to the left of the curve are said to be inefficient, because existing resources would allow for production of more of at least one good without sacrificing the production of any other good. (Ryerson) says an efficient point is one that lies on the production possibilities curve. At any such point, more of one good can be produced only by producing less of the other.
Scarcity necessitates choice. In other words, due to scarcity, the company chooses what goods and services to produce. For example, if one assumes that the company’s available quantities of resources do not change as time progresses and that technological progress does not occur. If the economy is operating on the PPF, production Y would need to be sacrificed to produce more of product X. (Lipsey)1 .
the diagram above shows choice of production if resources are efficient. The company can choose between two points on the PPF. They can choose point B if product Y is of importance, point C if product X is needed the most or point D if the requiment for both products is equal
The opportunity cost of a course of action is the benefit forgone by not choosing its next best alternative. In opportunity cost a sacrifice has to be done to choose an alternative. In other words, when a company chooses what goods and services to produce, it is choosing what goods and services not to produce. If there is no increase in production resources, the increase of production of the product Y entails the decrease of production of product X. The above diagram shows the sacrifice of product X on point B while point D shows the sacrifice of product Y.
Opportunity cost is measured in the number of units of the second good forgone for one or more units of the first good. In the diagram below producing 10 more packets of product Y, at a low level of butter production, costs the loss of 10 packets of product X as shown on point B. Point C shown that the economy is producing a maximum output of product Y. In other words in order to produce 10 more packets of product Y, 10 packets of product X must be sacrificed as illustrated by the movement from point C to point D.
• D (unattainable)
0 X1 X2
OPPORTUNITY COST DIAGRAM
In conclusion the PPF…., All the points on the curve show maximum production efficiency, that is there is no more production of any good that can be achieved from the available resources without sacrificing