- Define PPC, scarcity, choice and opportunity cost.
- Explain how PPC relates to scarcity, choice and opportunity cost.
The concepts of scarcity, choice and opportunity cost can be explained with reference to the production possibility curve [address the question].
Scarcity leads to choice and choice leads to opportunity cost. Although resources are limited, human wants are unlimited [reason for scarcity]. Scarcity is the situation where limited resources are insufficient to produce goods and services to satisfy unlimited human wants [definition of scarcity]. Scarcity necessitates choice. In other words, due to scarcity, society chooses what goods and services to produce. The opportunity cost of a course of action is the benefit forgone by not choosing its next best alternative [definition of opportunity cost]. In other words, when society chooses what goods and services to produce, it is choosing what goods and services not to produce.
Introduction to PPC
The production possibility curve (PPC) reflects scarcity, choice and opportunity cost [Point]. Suppose there are only two goods produced in the economy. The PPC shows all the different combinations of the two goods that can be produced in the economy when resources are fully and efficiently employed, given the state of the technology [definition of PPC].
Overview on how PPC reflects scarcity, choice and opportunity cost
The side diagram is a production possibility curve. Although the points inside and on the PPC such as points A, B, C and D are achievable, the points that lay outside the PPC such as point X are not. Scarcity is reflected by the unattainable points (such as X) that lie outside the PPC [how scarcity is reflected by the PPC]. The PPC is a series of points rather than a single point. Choice is reflected by the need for society to choose among the series of points on the PPC, such as points B, D and C [how choice is reflected by the PPC]. Opportunity cost is reflected by concave nature of the PPC [how opportunity cost is reflected by the PPC].
Explanation and elaboration on how the PPC reflect scarcity
An increase in the production capacity in the economy will lead to an outward shift in the PPC resulting in a decrease in scarcity and vice versa [point]. When the PPC shifts outwards, some of the previously unattainable points will become attainable. The production capacity in the economy could increase due to an increase in the quantity or the quality of factors of production [explanation and elaboration]. For instance, education and training which will lead to greater human capital will increase the skills and knowledge of labor and hence the production capacity in the economy, thus shifting the PPC outwards. [example].
Explanation on how the PPC reflect choice
A change in the tastes and preferences of society will lead to a movement along the PPC which reflects a change in choice [point]. The tastes and preferences of society may change due to technological advancements [explanation and elaboration]. For instance, the invention of the smartphone and tablet computing has led to a change in the tastes and preferences of society towards electronic publications. As such, the market may be more inclined to produce more electronic publications [example].
Explanation on how the PPC reflect opportunity cost
The PPC is concave to the origin because the opportunity cost of producing each good increases as its quantity increases [point]. This is because resources are not equally suitable for the production of different goods. As the economy produces more and more of a good, it has to use resources that are less and less suitable for producing the good to actually produce the good. Therefore, increasingly more units of other goods have to be given up to produce each additional unit of the good [explanation and elaboration]. For instance, a farmer has a plot of very arable land that can be used to grow strawberries. To increase production of the strawberries, the farmer may have to utilise surrounding plots of land which are less fertile. As a result, the yield of strawberries per acre of land would decrease. Thus, the PPC is concave [example].
In conclusion, the PPC relates to us the concepts of scarcity, choice and opportunity cost.
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