Scarcity, Choice & Cost

Under scarcity, we cannot get all the goods we want. We are willing to and have to make choice among the alternative combinations of scarce goods that we can have. When a choice is made, alternative options are to be forgone. The highest valued option forgone is termed as opportunity cost. It implies we have always to bear a cost in making a choice. In short, scarcity implies cost.

Production Possibility Curve

The production possibility curve shows all combinations of two goods that a country can produce, given the resources and the best technology available.

The concept of scarcity, choice and opportunity cost can be illustrated with the production possibility curve. Because of scarcity, the country can only produce limited amounts of Good X and Good Y. Along the PPC, the country has to make a choice in the production of Good X and Good Y. If more of Good X is produced, the country has to go with less of Good Y. Cost is the highest-valued option forgone. The amount of Good Y forgone in order to produce more of Good X is the cost of producing more of Good X.

The PPC is concave to the origin. This means that when one wants to produce more of a good, a greater and greater amount of the other has to be sacrificed as the slope of the PPC is increasing. It is because not all resources are equally efficient in producing the same good. As labour who is skill ful in producing good X is shifted to produce good Y, less output will be produced. So, the cost of producing extra unit of good Y becomes greater.

If the country's production of good X and good Y lies along the PPC, the production is efficient.

If production of good X and good Y lies within the PPC, it means that resources or technology are not fully employed. Then the production is inefficient.

As times pass, resources will be increased and technology will be improved, the PPC can be shifted outwards to the right. We call this economic growth.