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AN ESSAY ON HOW USE THE PRODUCTION POSSIBILITY FRONTIER TO EXPLAIN THE ECONOMIC CONCEPTS OF SCARCITY

March 8, 2019 0 Comment

AN ESSAY ON HOW USE THE PRODUCTION POSSIBILITY FRONTIER TO EXPLAIN THE ECONOMIC CONCEPTS OF SCARCITY, CHOICE AND OPPORTUNITY COST
Economics revolves around the study on how to use scarce resources to efficiently satisfy unlimited human needs (Lipsey,2011). Many economies face a situation where resources are not sufficient to produce goods and services to satisfy infinite human needs. This gives rise to the economic problem and the choices people make to satisfy their needs. They argue that nations have to make economic decisions on how to obtain maximum satisfaction from available resources, good choices on availability of resources have to be made. A commodity is said to be scarce if its demand is higher than supply or if consumers cannot afford to pay for the commodity. The cost of a commodity is a sign of its scarcity. Adam Smith, an economists argues that for almost every commodity we consume as individuals or society there is value assigned to it. By consuming one commodity another one is sacrificed or foregone. If factors of production or scarce resources are used one way rather than another, opportunity cost of a choice represents the second best use of scarce resources.
A production possibilities frontier (PPF) is an economic model that shows the different combinations of goods and services that can be produced with a given amount of resources. The possible production frontier is based on assumptions that resources are limited, a choice has to be made between two commodities and that every economy wants to achieve efficiency. The other assumptions when constructing a production possibility frontier are that all nation’s resources are efficiently used at all points on the production possibility frontier. Thus, all points on the production possibility frontier represent production efficiency and all resources are fully employed. The nation’s decision to produce at a certain point on its production possibility frontier represents efficiency. Allocative efficiency occurs when there is a demand for all of the commodities produced by the producer. If a production decision does not satisfy with consumers’ needs, a lots of unwanted goods could sit unsold on store shelves. The second assumption is that other factors are constant.
Scarcity is a term used when demand of a product is greater than supply or the consumers of the commodity cannot afford the asking price. Other scholars define scarcity as a situation where there are insufficient resources to satisfy everyone’s needs and wants. An example is that of maize. A nation can only afford to produce a certain tonnage of maize per annum and that tonnage becomes a limitation. The government or a nation will be left with a problem of deciding how much maize should be allocated for maize-meal, how much for beer production and how much for stock-feeds. Obviously beer drinkers would demand more maize for beer production, farmers would demand more maize for stock-feeds and so would be the hungry population in Bocha who will demand that they get a priority. All these demands would demand to be satisfied from a limited tonnage.
The production possibilities frontier below for Country A for two commodities, tractors and jeans. I will endevour to explain the economic concept/ decision of scarcity using the diagram above. As earlier alluded to, scarcity can occur when demand is greater than supply or when consumers cannot afford the said commodities. Therefore if anything is for free its demand will be high and suppliers will not be able to supply them. The possible quantities of jeans are shown on the horizontal axis, while the possible quantities of tractors are shown on the vertical axis. The production possibilities frontier model shows two things, the amount of each good than can be produced at each point on the curve, and the opportunity cost of each possible production decision
X
X2 A E
X0 B
D
X1 C

Y
Y2 Y0 Y1 Jeans
On the above production possibilities frontier point E represents scarcity as the available resources cannot sustain production at that level without introduction of new innovations or injection of extra resources. In order to maximize satisfaction from limited resources country A can should choose how much capital goods and consumer goods to produce from their limited resources. At point B, X0 units of tractors are produced, only Y0 units of jeans are capable of being produced. Point B becomes the first production possibility combination. The nation may choose to change their priorities and prioritize the production of jeans. In this case, the nation will have to channel more of its resources towards the production of jeans and in doing so, less tractors will have to be produced. Therefore since resources are scarce, if we are to increase production of jeans from Y0 to Y1, a corresponding decrease the production of tractors should be witnessed. Resources will be withdrawn from the production of tractors hence at a point where the nation is producing Y1 jeans only X1 tractors can be produced. Point C becomes the production combination of producing X1 tractors and Y1 quantities of jeans. The same procedure can be reversed, if the nation chooses to produce more tractors less of jeans will be produced.
Tractors PPF1
X PPF0
X2 A E
PPF2 X0 D B

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X1 C

Y
Y2 Y0 Y1 Jeans
If the possible production point A, B and C are joined together they give us the production possibility frontier. It is assumed at any point along the production possibility frontier employment of production resources is efficient. Production at D inside the existing production possibility frontier shows inefficient use of available resources. Is shows resources are available but are not being fully utilised. The underutilization of resources may be in the form of unemployment or idle factories. Production at point E is desirable but not possible. The available resources cannot sustain the production at point E. The production combination at point E is only possible if there is introduction of new technological innovations in the production of goods and services or if the government avails additional resources. In this case, there would be a positive shift (to the right) as more of each commodity can be produced from the available resources. A shift to the inside of the original production possibility frontier represent a negative shift meaning there is inefficient point of production because it does not fully maximize the use of available resources. . A negative shift in the production possibility frontier maybe a result of a natural disaster, war corruption or simply the productive resources being channeled elsewhere (corruption). If less key productive resources are available, the production possibility frontier negatively shift inwards as fewer quantities of both commodities are produced.
Tea X
X2 A E
X0 B
D
X1 C

Y
Y2 Y0 Y1 Coffee
The concept of choice can be best explained where there is a choice between two alternatives. Since resources are finite and cannot satisfy infinite human needs, a choice has to be made from what we can produce. We can choose between capital goods and consumer goods, we can choose between consumer goods as illustrated by the diagram above. The choice can be necessitated by a change in taste and preferences of the consumers. An individual, a firm or a nation may choose to produce X quantities of tea and zero quantities of coffee. If we choose to produce Y quantities of coffee then we are going to produce zero quantities of tea. The above example is an extreme where one commodity is chosen over the other which is rare in practical terms. Practically, they are some alternatives which will always exist like we can choose between coffee and tea but cannot forego to produce any of the two. The nation or firms have to satisfy the different needs of these two groups of consumers by either deciding what amount of the available resources to channel towards the production of coffee and tea from the same number of resources. At point A, a nation or industry can produce X2 quantities of tea and Y2 quantities of coffee. At point B the choice is to produce X0 quantities of coffee and Y0 quantities tea. Looking at it closely this was a choice to channel more resources towards the production of coffee rather than tea. At point B it’s a choice to produce a certain quantity of coffee and tea. The same process will also apply, in case of a positive shift or negative shift of the production possibility frontier. However, it must be noted that again for every choice made there is a cost attached to it.
X
X2 A E
X0 B

X1 C

Y
Y2 Y0 Y1 Jeans
Opportunity cost is a measure of costs expressed as alternative given up, rather than in terms of money (Lipsey, 2011). This concept does not attach cost only to the choices we make but it also attaches value to what was foregone. The choices we make have a cost. Economists assign a value, or opportunity cost, to any decision in terms of what was sacrificed or foregone. If factors of production or scarce resources are used one way instead of another, the opportunity cost of a choice is the best alternative use of these scarce resources. Firms and countries have to make choices on the use limited resources to meet different people’s needs. The chosen production choices leads to opportunity costs. The diagram above illustrates the opportunity costs as a result of a production choice. At point B the nation has a production capability of X0 tractors and Y0 jeans. Assuming the nation decides to prioritise the production of tractors and produce at point A. The production of tractors will increase from X0 to X2 while the production of jeans will shift from point Y0 toY2. The reduction of quantities of jeans produced from Y0 to Y2 is the opportunity cost of producing an extra X0 to X2 quantities of tractors. Opportunity cost of producing at point A is Y0 to Y2 quantities of jeans. Re-allocating resources to produce at point C from point B will result in an increment in production of jeans from Y0 to Y1. To produce an extra Y0 to Y1 quantity of jeans, the nations has to sacrifice X0 to X1 quantities of tractors. The shaded area X0 to X1 is the opportunity cost of producing at point C for the nation to produce Y1 jeans, they have to forego producing X0 to X1 of tractors. If the nation then decides to re-allocate resources in order to produce X0 tractors they have to reduce production of jeans from YI to Y2. The concept according to Lipsey, is that the downward or negative slope of the production possibility frontier represent opportunity cost and that opportunity cost increases as we continuously shift towards the production of one good than the other.
The economic concepts of scarcity, choice and opportunity cost are intertwined and cannot be dealt with in isolation. The scarcity of resources versus the unlimited humans needs necessitates choice. The choice can be between two attainable options. In having to make a choice, there is a sacrifice or forgoing the next best alternative.

REFERENCE LIST
1. Beardshaw John, (1980) Economics, longman, L
2. Lipsey Richard, (1995) Introduction to Positive Economics Oxford University
3. Lipsey and Chrystal (2011), Economics, Oxford University Inc. 12th Edition
4. Paul R Krugman, Maurice Obtfeld, Addsion Wesley (2012) International Economics: Theory and Policy, 9th Edition, Pearson.

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