Economic Scarcity and Production Possibilities Frontier

The Principle of Scarcity

The principle of scarcity states that human needs are unlimited while the resources at our disposal to meet those needs are scarce and have alternative uses. This concept is studied through the Production Possibilities Frontier (PPF), which consists of all those combinations of products that optimally use the amount of resources a country possesses.

Graphic Representation of the PPF

• Efficient: These points are on the curve itself; you obtain the maximum amounts of product with the resources the country possesses, utilizing them at 100%.
• Inefficient: These points are below the curve; at these points, not all resources a country possesses are used, meaning there will be idle resources.
• Unattainable: These points are above the curve; the country cannot produce such quantities of products because it lacks sufficient resources.

Opportunity Cost and Shifts

Opportunity Cost: The PPF curve is decreasing; to increase the amount of production of one good, we have to decrease the quantity produced of the other good. The amount of product that is left behind to produce more of the other is called the opportunity cost.

Moving the PPF:

• Right: The curve shifts right when a country experiences an economic expansion, thereby increasing the amount of available resources and increasing production.
• Left: The curve shifts left when a recession occurs, meaning the country has fewer resources available.

The Basic Economic Problems

What to Produce?

The country needs to know the tastes of its population and the needs it has to cover. It must also know the resources or factors of production it has to determine which goods and services are most profitable, so that it does not have to import those products and can export the surplus of what it produces. This involves the principle of comparative advantage.

How to Produce?

• Craftsmanship: The product is made manually.
• Mechanized Technique: This is one in which machines are used in the production process; humans manage these machines and tools.
• Robotic Technique: The machine performs the entire production process, and humans are responsible for control in a computerized form.

For Whom to Produce?

This involves responding to which population the product will be allocated to, examining the socio-economic purchasing power of the population. We can allocate the product to the general population, in which case we will work with a mass product, or a niche market, which is destined for a specific share of the population.