SCARCITY AS THE CENTRAL ECONOMIC PROBLEM
REINFORCEMENT OF UNDERSTANDING AND REVIEW
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SCARCITY AS THE CENTRAL ECONOMIC PROBLEM
Scarcity arises because of limited resources and unlimited wants. Scarcity is represented by the unattainable combinations of food and housing which lie outside the PPC e.g. Point A. Some wants cannot be satisfied as an economy can only produce a maximum quantity of food for a given quantity of housing being produced with its current amount of resources and technology. An economy is thus constrained by the limited resources available.
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SCARCITY AS THE CENTRAL ECONOMIC PROBLEM
An economy has two uses of land: food and housing. Using a production possibility curve (PPC), explain and illustrate the concept of scarcity, choice and opportunity cost.
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SCARCITY AS THE CENTRAL ECONOMIC PROBLEM
As a result of scarcity, choices will have to be made. This is represented by points B, C and D as these are possible combinations of food and housing that can be produced with the limited resources available in the economy.
Opportunity cost refers to the value of the next best alternative forgone when a choice is made. In making the choice to move from point B to point C, the opportunity cost of producing 4 more units of housing is 10 units of food.
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02
SCARCITY AS THE CENTRAL ECONOMIC PROBLEM
With the use of an example, explain the concept of opportunity cost.
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SCARCITY AS THE CENTRAL ECONOMIC PROBLEM
Opportunity cost refers to the value of the next best alternative foregone when a choice is made.
Suppose a consumer chooses to spend an extra hour sleeping. (Resource- Time) He could have spent the same hour watching television, reading a book or go for a meal instead. If he considers watching television as his next best alternative, the opportunity cost of sleeping is the satisfaction (net benefit) derived from watching television .
(Ranking of choices)
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03
SCARCITY AS THE CENTRAL ECONOMIC PROBLEM
The on-going shale oil boom in United States of America, where abundant oil and gas have been extracted from underground rocks by blasting them with a mixture of water, chemicals and sand–a new method called “fracking”.
With the help of a production possibility curve, show and explain the effect of the new technology of fracking on food and oil production in the United States of America.
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SCARCITY AS THE CENTRAL ECONOMIC PROBLEM
With the new technology of fracking, the quality of capital improves. Thus, the ability to produce oil increases while the ability to produce food remains the same for the economy. Hence, productive capacity of oil will increase while the productive capacity of food will remain constant. This then causes a pivotal shift of the PPC.
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SCARCITY AS THE CENTRAL ECONOMIC PROBLEM
Explain the reason why PPC has a concave shape.
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SCARCITY AS THE CENTRAL ECONOMIC PROBLEM
A concave shape of the PPC indicates that the opportunity cost is increasing. This is because factors of production are non-homogenous. For example, as more and more units of clothing are being produced, more and more factors of production e.g. labour which are better suited at producing food but less suited at producing clothing are being reallocated to produce clothing. This thus contributes to increasing trade-offs and thus increase in opportunity cost as more clothing is being produced.
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