Concepts of Scarcity
Scarcity refers to the condition of insufficiency where human beings are incapable to fulfill their wants in a sufficient manner. In other words, it is a situation of fewer resources in comparison to unlimited human wants. Human wants are unlimited. We may satisfy some of our wants but soon new wants arise. It is impossible to produce goods and services so as to satisfy all the wants of people. Thus scarcity explains this relationship between limited resources and unlimited wants and the problem therein.
Economic problems arise due to scare goods. These scare goods have many alternative uses. For example, land can be used to construct a factory building or to make a beautiful park or to raise agricultural crops. So, it is very essential to think about how limited resources can be used alternatively to satisfy some wants of people to get maximum satisfaction as possible.
The problem of scarcity is present not only in developing countries but also in highly developed countries such as Japan, Canada, etc. Thus, scarcity is the heart of all economic problems.
Concept of Choice
The choice is the process of selecting a few goods or wants from the bundles of goods or wants. Human wants are unlimited. So, they are unable to fulfill all their wants at once. They can satisfy only some of their wants. Some wants should be sacrificed to get some other wants. Hence, people postponed less urgent wants to satisfy more urgent wants. For example, a boy desiring to buy a book does not visit the cinema hall. Thus, the problem of choice deals with the utilization of scarce resources in such a way that it satisfies human wants in the best possible way. If human wants were limited or resources were unlimited, then, there would be no scarcity and there would be no problem of choice. Because of scarcity, we are forced to choose. Unlimited wants and limited resources lead to economic problem and the problem of choice which can be shown as follows:
Allocation of Resources
Allocation of resource means scientific management of resources in the production, distribution, and exchange. It deals with how much resource is necessary for what sector. It is the basic problem of every economy. We can satisfy only limited wants because we have limited resources. So, these limited resources are used in such a manner that the satisfaction derived from it is maximum. As the resources are limited in comparison to wants, the proper allocation of resources is necessary. The proper allocation of resources deals with the following fundamental problems of an economy.
1. What to produce: This means what amount of goods to be produced. Every demand of every individual can’t be satisfied. So, before producing anything, a decision should be made what goods are to be produced and to what extent.
2. How to produce: This means which techniques of production (labour intensive or capital intensive technique to be selected). After the decision of what to produce, we must next determine what techniques should be adopted to produce goods.
3. For whom to produce: This means how the produced goods and services are to be distributed among different income groups of people that is who should get how much. This is the problem of sharing of the national product.
4. The problem of full employment: This means the efficient use of scarce resources that is no waste or misuse of resources. Since resources are scarce in relation to human wants. It is necessary to utilize the available resources to achieve full employment for maximum possible satisfaction.
5. The problem of growth: This means how to achieve the growth of resources. The growth of resources is related to an increase in the level of production. Each economy faced the problem of how to increase its production capacity. For this, the economy has to decide about the rate of capital formation, investment, and savings.
Production Possibility Curve(PPC)
Production possibility curve analysis graphically the problem of scarcity and choice present in an economy. It shows the maximum possible production of different combinations of two goods that can be produced with the given technology and resources. It also analyzes how much the production of one commodity has to be decreased when producing some other commodity. The curve is also known as product transformation curve because when moving from one point to another, the uses of resources from one commodity transfer to the production of another commodity. The concept of the production possibility curve is based on the following assumptions:
1. The factors of production are limited.
2. The factors are used only for the production of two goods x and y.
3. The production technique is given.
4. The factors are fully utilized.
5. It is based on a short run.
Based on the above assumptions, the PPC can be explained with the help of table and diagram as follows:-
Production Possibility Curve (PPC)
| Production possibilities | Goods x(In thousands) | Goods y(In thousands) |
| A | 0 | 15 |
| B | 1 | 14 |
| C | 2 | 12 |
| D | 3 | 9 |
| E | 4 | 5 |
| F | 5 | 0 |
Above table shows the various production possibility of goods x and y. If all the resources are used for the production of goods x, 5000 of goods x are produced. Similarly, if all the resources are employed for the production of goods y, 15000 of goods y are produced. These are the two extremes of production possibilities. In between these two extremes, there are many other production possibilities, like at combination B, thousand of goods x and 14000 of goods y can be produced. Similarly, at combination ‘C’, ‘D’ and ‘E’, the production possibilities of goods x are 2,3,&4 thousand and goods y are 12, 9 and 5 thousand are produced. Therefore, it is clear that more of one goods can be obtained by cutting down the production of other goods. For example, if the producer produces within the combination ‘C’, the producer is ready to sacrifice two units of goods y for the production of one more unit of goods x.
A possibility schedule has been shown by the following figure:-
In the above figure, goods x and y are measured along x-axis and y-axis respectively. AF is the production possibility curve which is derived by joining the production possibility points A, B, C, D, E and F. Each point on PPC shows the efficient for the production.
The shift in Production Possibility Curve (PPC)
Production Possibility Curve shift either downward or upward. PPC shift downward or upward due to the following reasons: –
1. Change in the capital.
Increase in capital increases the quantity of production due to which PPC shift upward. And if capital investment decreases, then the production will also decrease which causes a downward shift in PPC.
2. Change in labour force.
If the efficiency of labour force increases, then the production of goods also increases, as a result, the burden of labour force production will decrease. As a result, PPC shifts downward.
3. Change in technology.
If the production technique is improved, then the production will increase which brings upward shift in PPC. If old technology is used in the production process, production will decrease which brings downward shift in PPC.
4. Change in Time period.
PPC can shift due to the change in the time period. In the long run, the economy can gain efficiency which results in an increase in productivity. As a result, PPC shifts upward, but the economy can’t get efficiency in production, the production decreases and PPC shift downward.
Similarly, proper management of available resources, increase in economic growth, new raw materials, education, training to labour etc. increase the production which will shift the PPC upward. But mismanagement of available resources, decrease in economic growth, adequate raw materials, etc. decrease the production which will shift the PPC downward.
Why PPC expands outwards?
Ans: PPC expands outwards due to different factors. Investment in new plants and machinery will increase the stock of capital. New raw materials may be discovered. Technological advances take place through new inventions; education and training make labour more productive. All these factors lead to increase in the production possibility of the country and while illustrating this growth of potential output in PPC, there will be an outward expansion of PPC.
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