Central Problem of Economics

Scarcity, Choice and Opportunity Cost

Definitions
Scarcity refers to the situation where the limited resources available are unable to satisfy
the unlimited human wants
Because resources are scarce, they have alternative uses. Therefore, individuals and
societies must make choices among the alternative uses so as to maximise the use of
resources to achieve the highest possible level of satisfaction
Opportunity cost measure the cost of making a choice in terms of the next best alternative
foregone

Scarcity
Limited Resources
- Land
o All natural resources
- Labour
o Any human effort in the production of goods
- Capital
o Physical assets that are man-made to aid in production
- Entrepreneurship

Choice

- What and how much to produce

- How to produce
- For whom to produce
Law of Increasing Opportunity Cost
Definition
The law of increasing opportunity cost states that as more of a particular good is produced,
larger and larger quantities of the alternative good must be sacrificed
The PPC shows all the different maximum attainable combinations of goods and service that
can be produced in economy, when all available resources are fully and efficiently used at a
given state of technology

Production Possibility Curve

Scarcity
- Scarcity is illustrated by the fact that combinations outside the PPC cannot be
attained.
- If the economy wants a point outside, it cannot do so given the present state of
technology and resources and the economy faces scarcity
Choice
- Combination of goods found on the PPC are attainable but the economy can only
choose one combination
- A decision to choose B would mean that A, C and D cannot be considered
Opportunity Cost
- The negative slope of the PPC illustrates opportunity cost as to get more of one
good, the economy must make do with less of the other good
Increasing Opportunity Cost
- Shown a concave shaped PPC
- Show how producing more of one good results in more of the other good being
sacrificed each time
Economic Growth
Actual Growth
- Point inside the PPC, not fully utilising resources
- Actual growth can be achieved by have greater use of resources and using them
more effectively
- Actual growth would result in movement of point inside the PPC

Potential Growth
- Represented by outward shift of PPC if quantity or quality of resources increase the
production of both goods
- If citizens prefer more of current consumption, future PPC will only shift out a little.
Raise current standard of living but opportunity cost of slower improvement or vice
versa

Factors affecting Potential Growth

Increase in Quantity
- Labour
o Encourage population growth/foreign talent
o Greater participation by women and retirees
- Land
o More exploration to find new natural resources
- Capital
o Produce more capital goods by reducing current consumption
o Result in greater output of both goods
Increase in Quality
- Labour
o Improvement in skills through education or training
o Giving out incentives to encourage better work effort
- Land
o Application of fertilizers
o Better irrigation techniques
- Capital
o Technological improvement by discovering new production methods
o Require investment to R&D