One of the main important concepts in economics is scarcity. It means the state of being scarce or in short supply. Scarcity is the fundamental problem and it can be explained as a nation or society are always having unlimited wants to fulfill or satisfy their needs in a world of limited amount of resources of factors of production. As we can see here is an example of the graph that illustrates point A as scarcity which is unattainable or above the limits of the resources given and that the same resources cannot be utilized to different goods Product A and B at the same time.
Here, we turn to more macroeconomic matters that occur on the level of national economies. There are just enough apple orchards producing apples, just enough car factories making cars, and just enough accountants offering tax services.
If the economy is not producing the quantities indicated by the PPF, resources are being managed inefficiently and the stability of the economy will dwindle. The production possibility frontier shows us that there are limits to production, so an economy, to achieve efficiency, must decide what combination of goods and services can and should be produced.
Imagine an economy that can produce only two things: For instance, producing 5 units of wine and 5 units of cotton point B is just as desirable as producing 3 units of wine and 7 units of cotton. Point X represents an inefficient use of resources, while point Y represents the goals that the economy simply cannot attain with its present levels of resources.
As we can see, in order for this economy to produce more wine, it must give up some of the resources it is currently using to produce cotton point A. If the economy starts producing more cotton represented by points B and Cit would need to divert resources from making wine and, consequently, it will produce less wine than it is producing at point A.
As the figure shows, by moving production from point A to B, the economy must decrease wine production by a small amount in comparison to the increase in cotton output. However, if the economy moves from point B to C, wine output will be significantly reduced while the increase in cotton will be quite small.
Home > Micro-economics > Production Possibility Frontier. 1. Production Possibility Frontier. A production possibility frontier shows how much an economy can produce given existing resources. A production possibility can show the . HOME Free Essays Basic Economic problem of Scarcity. Basic Economic problem of Scarcity Essay. A+. Pages:4 Words: The basic economic problem of scarcity refers to the situation in which finite factor inputs are insufficient to produce goods and services to satisfy infinite human wants. The PPC is a economic framework that can be used to. Admissions and scholarships applications for Texas institutions of higher education.
Keep in mind that A, B, and C all represent the most efficient allocation of resources for the economy; the nation must decide how to achieve the PPF and which combination to use.
If more wine is in demand, the cost of increasing its output is proportional to the cost of decreasing cotton production. Markets play an important role in telling the economy what the PPF ought to look like. Consider point X on the figure above. On the other hand, point Y, as we mentioned above, represents an output level that is currently unattainable by this economy.
But, if there were a change in technology while the level of land, labor and capital remained the same, the time required to pick cotton and grapes would be reduced. Output would increase, and the PPF would be pushed outwards.
A new curve, represented in the figure below on which Y would fall, would then represent the new efficient allocation of resources. When the PPF shifts outwards, we can imply that there has been growth in an economy.
Alternatively, when the PPF shifts inwards it indicates that the economy is shrinking due to a failure in its allocation of resources and optimal production capability. A shrinking economy could be a result of a decrease in supplies or a deficiency in technology.
An economy can only be producing on the PPF curve in theory; in reality, economies constantly struggle to reach an optimal production capacity. And because scarcity forces an economy to forgo some choice in favor of others, the slope of the PPF will always be negative; if production of product A increases then production of product B will have to decrease accordingly.Amanda received her B.A in Economics from Vanderbilt University and her M.S in accounting from the Owen School of Management.
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Some common mistakes are: Avoiding topics you don’t understand in class. Production Possibility Curve and Basic Economic Questions: Scarcity, Choice, and Resource Allocation. Production possibility frontier or curve is an important concept of modern economics.
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This concept is used to explain the various economic problems and theories.