Basic Economic Issues: Scarcity, Choice, Allocation of resources, Production possibility Curve (PPC)
Scarcity:
The scarcity of
goods is the basic characteristics of economic world. This characteristic
create economic problem. The economic goods and human resources are always
scarce. Only the natural resources such as: air, water and sunlight are found
in unlimited quantity. The economic goods should be distributed among the
people due to scarcity.
The word
scarcity is used in relative sense. All the means are scarce in relation to
human wants. There is scarcity of productive resources such as land, labour,
raw materials, machinery, equipments, etc. in the world. Therefore, it is
impossible to produce all goods and services to satisfy all wants of the people.
Choice:
Resources have
alternative uses. For Eg: A plot of land can be used either for producing paddy
or wheat or vegetables or fruits, etc. So, choice is necessary due to scarcity
of resources. All the resources are limited compare to demand. Therefore, the
society must have to choose which commodity is to produce and which commodity
is to sacrifice. Hence, the problem of choice arises.
People have to
make choice while spending their income. They have to think how much to spend
and how much to save out of their income. Similarly, it is also necessary to
decide how much to spend on food, how much on dress and how much recreation. In
this way, choice is the basic economic problem.
Allocation of resources:
Resources are
scarce and have alternative uses. Therefore, allocation of resources is the
central economic problem. Here, allocation of resources means distribution of
resources in the economy. In a free market economy, the scarce economic
resources are allocated in the following ways:
Determining what will be produced:
The
first resource allocation function is to decide what goods and services will be
produced. It is because resources are scarce.
Determining how it will be produced:
The
second allocation function is to decide how goods and services will be
produced. It is because there are different ways of producing a product.
Determining whom to produced:
This
third function is to decide who will get the goods and services which are
produced. It is because economic resources are scarce.
In a free market
economy, allocation of resources is determined by price mechanism through
demand and supply of resources.
Production Possibility Curve(PPC):
The
production possibility curve is a tool used to explain the problem of scarcity
and choice. A curve which shows the production possibilities that can be
produced with given resources and technology is called production possibility
curve. This curve is also called production fontire or production
transformation curve. According to David Begg: “The production possibility
curve shows maximum combination of output that the economy can produced using
all available resources.”
Assumptions:
The PPC curve is based on the following assumptions:
I.
Only two goods are produced in the economy that is x
and y.
II.
There is full employment of resources.
III.
The supply of factors are fixed.
IV.
The time period is short.
V.
The production techniques is given and constant.
The concept of
production possibility curve is shown in the following table and diagram.
Combinations
|
Productions of x
(Capital goods)
|
Production of y
(Consumer goods)
|
A
|
0
|
15
|
B
|
1
|
14
|
C
|
2
|
12
|
D
|
3
|
9
|
E
|
4
|
5
|
F
|
5
|
0
|
This table shows
the production possibilities of x and y goods that can be produced with given
resources. If all available resources are used for the production of y goods,
the economy can produce 15 units of y and 0 units of x. Similarly if all
available resources are used in the production of x goods, the economy can
produce 5 units of x and 0 units of y. These two are extreme points in between
these there are various other possibilities.
In
this diagram, AF is the PPC curve. The economy can produced any combination
lying on this curve i.e. A, B, C, D, E & F. The point H lying above the
curve cannot be obtained because of scarcity of resources. Similarly, the point
G inside the curve is inefficient because the resources are unutilized. The
economic cannot produce either inside or outside the PPC curve. Therefore, it
is called production possibility frontire.
Shift in Production Possibility Curve:
I.
Upward shift
in PPC:
If
there is increase in production capacity in the economy the PPC Curve shifts
upward to the right. The increase in the size of working population, increase
in the labour productivity and technology progress shift PPC Curve upward. This
can be shown in the following diagram:
In
this diagram, AF is the initial PPC curve. Now, with the increase in labour
force, labour production & introducation of new technology increases the
productive capacity of the economy. As a result, PPC curve shift upward in the
form of A1F1.
II.
Downward
shift in PPC:
If
there is decrease in productive capacity in the economy the PPC curve shift
downward to the left. The decrease in the size of working population decrease
in labour productivity and depletion of natural resources shift PPC curve
downward. This can be shown in the following diagram.
In this diagram, AF is the original
production possibility curve due to the decrease in productive capacity of
economy because of decrease in labour force, decrease in labour productivity
and depletion of natural resources causes these curve shift downward in the
form of A1F1.
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