With the aid of diagrams
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.
All economies face a challenge of sufficient resources endowment to satisfy people’s infinite needs and wants due to scarce resources. 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 factors of production are land, labour, capital and entrepreneurship, and are never adequate resources to satiate the production requirements of firms in a performing economy. These resources will never be enough to satisfy human needs and wants.
Faced with limited resources, production choices have to be made of what consumer or capital goods to produce from at least two other possibilities e.g. motor vehicles and cereals. The concept of choice obtains 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 maximum benefit from limited resources. There is however some irrational decisions 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 it as a benefit, profit or value of whatever must be given up to obtain some item. The cost of selecting to use a resource for one purpose is measured by the next best alternative for using the resource. Consequently 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) efficiency is attained when the economy produces the highest possible return of one product 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 assuming that decision makers 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 the Production Possibility Frontier /Curve or Boundary (PPF/C/B) graph. Production refers to the output; 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 production quantities and the most economical way of doing it e.g. the quantity of metric tonnes of cereals and beef Zimbabwe should produce efficiently. The PPF graph provides the required responses. It is premised on three important assumptions which are firstly, the maximum utilisation of resources, secondly the scarcity and lastly the unchanging technology. The determinants to produce in this instance are scarcity, choice and opportunity cost. The PPF graph, Figure 1 below, illustrates the production of patrol boots and beef as an example of goods required by country X to satisfy her people’s needs. The model assumes that resources are used optimally, 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 concave arc from the Y to X axis (YAEBX) shows the boundary or limitation of resources allocated to Country X. Points confined in and on the edge of the curve/ frontier manifest that production is attainable and suffice the resources available to Country X. Any external point the e.g. point C is desirable but unattainable using 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. One option is for Country X to produce y0 (six thousand) units of patrol boots and zero tonnes of beef. This choice will be said to be efficient as there is optimal use resources. However, in any country this scenario is not realistic as one may not find people needing patrol boots only without the need of the other good i.e. beef. Therefore the PPF curve in most instances 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.
Country X may decide to produce y3 units of boots and x3 units of beef as shown at D (point inside the arc). This option reflects inefficient production as it is contravening the important assumption of maximum commitment of resources. 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 imported 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 improved significantly. Figure 1 clearly illustrates the efficient and non efficient production of goods and services.
The major aim in any economy is achieving growth. An increase or reduction of any economy will affect the curve by shifting it outwards or inwards respectively as shown at Figure 2. When the curve shifts to the right, it is a reflection of growth while a shift to the left points to a reduction in efficient performance. Shifts in the curve are occasioned by changes in technological advances of new and advanced machinery or change in labour force. It can also be shifted by discovery of rich minerals or oil. Inversely the exhaustion of such resources may shift the curve inwards. 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. 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 reflects too the inefficient levels if a country decides to operate inside the curve rather than along. Outward and inward shifts may occur due to technological advancement, expansion of natural resources base, 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 address the basic economic problems.
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Tucker, Jeffrey, Kinsella, Stphan (2010) Goods, Scarce and Nonscarce Retrived on 19 July 2018.