SCARCITY, CHOICE AND THE PRODUCTION POSSIBILITIES FRONTIER (CORE)
Scarcity, Choice and the Production Possibilities Frontier
o The Economic Problem of Scarcity
o Opportunity Cost
o Introduction to Production
o The Factors of Production
The Production Possibilities Frontier
o Introduction to Production Possibilities Frontier (PPF)
o Assumptions of the Production Possibilities Frontier
o Characteristics of the Production Possibilities Frontier(Summary)
The Economic Problem of Scarcity
The fundamental problem of economics is that we have unlimited wants, but limited resources to satisfy these wants. When wants exceed the resources available we have scarcity.Scarcity occurs because human wants exceed the limits of available resources. Economics deals with the basic fact that scarcity exists in our everyday lives and in our economy. Resources such as raw materials are in finite supply and must be allocated to their best use. Virtually all resources are scarce, meaning that more of them are desired than is available. Economics is concerned with the way people have to make choices in order to overcome the problems of scarcity.
Given the presence of scarcity, choices must be made as to how resources are allocated. Our lives are filled with a wide range of choices regarding the use of limited personal funds. Advertisers constantly inform consumers of their consumption possibilities and the choices available. The same principle applies for the economy as a whole. We elect politicians who work with policy makers to allocate government expenditures. Together they make difficult choices concerning how taxes will be spent.
The relevant cost of any decision is its opportunity cost - the value of the next-best alternative that is given up. This will mean that if we choose more of one thing, we will have to have less of something else.
Economists use the term opportunity cost to explain this behaviour. The opportunity cost of any action is the value of the next best alternative forgone. By making choices in how we use our time and spend our money we give something up. Instead of following the economics classs, what else could you be doing? Your best alternatives may involve sports, leisure, work, entertainment, and more. Thus, the concept of opportunity cost is your best alternative to the choice that is made. If you choose to go to a restaurant this evening, the money that you spend on dinner will not be available for other uses, even saving.
Businesses and governments also deal with opportunity costs. Businesses must choose what type of goods to produce and the quantity. Given limited funds, the opportunity cost of producing one type of good will arise from not being able to produce another.
Production occurs when we apply labour and capital to resources in order to increase the value of the resources. Given a scarcity of resources, it is desired that society will allocate them to their best uses. In many economies, the market performs most of the resource allocation role. Consumers indicate their preferences by purchasing goods and services. Producers wish to satisfy the demands of consumers by using scarce resources to produce those goods and services that consumers demand.
The Factors of Production
There are three major factors of production:
1. Land includes all natural resources, such as land, air, water, forests, wildlife, etc., 2. Labour includes all mental and physical effort exerted by human beings, 3. Capital refers to the improvements made to natural resources. Capital includes items such as buildings and machinery. While the definition of land and labor is readily apparent, let us briefly discuss the economic meaning of capital. Capital is used to assist labour in the production process and increase our capacity to produce goods and services. Workers use tools and machinery to become more productive and increase their output. In an...
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