Assignment on Scarcity and efficiency: The production

possibility frontier (table and graph) & how the society make
their choice

Mehedi Hasan Emon

ID 201632008
Scarcity and efficiency: The production
possibility frontier (table and graph) & how the
society make their choice

What is Economics in General?

Economics is the study of _________
 Economics is the science of scarcity.
 Scarcity is the condition in which our wants are greater than our limited resources.
 Since we are unable to have everything we desire, we must make choices on how
we will use our resources.
 In economics we will study the choices of individuals, firms, and governments.

Economics-Social science concerned with the efficient use of limited resources to achieve
maximum satisfaction of economic wants.
Study of how individuals and societies deal with scarcity.

Scarcity

 Scarcity -relationship between limited relationship between limited resources and

unlimited wants.

 Not all resources and unlimited wants. Not all human wants can be satisfied with human
wants can be satisfied with goods or services goods or services.

 Resources -the inputs used to make the inputs used to make goods we want. Resources
are limited goods we want. Resources are limited and this leads to scarcity
Scarcity or paucity in economics refers to limitation – limited supplies, components, raw
materials, and goods – in an environment with unlimited human wants. It is the fundamental
economic problem of having what appears to be limitless human wants in a world with limited
resources.

Scarcity is one of the economic assumptions that economists make. The others are self-interest,
trade-offs, costs and benefits, and models and graphs.

Determining how to make the best use of scarce resources is fundamental to economics. The
factors of production are not limitless, i.e., there is scarcity. Therefore, we must make choices
about how best to use them. This is where economics comes in

No scarcity = no economics

Imagine a world with no scarcity, i.e., a land of plenty. Imagine that everything, even time,
metals, minerals, raw materials, money was limitless.

In such a world, economists would have absolutely nothing to study. Nobody would have to
think carefully about how to allocate resources. Also, there would be no trade-offs to consider or
quantify.
The world we live in, however, is not like that. Absolutely everything around us costs something,
because every single resource is scarce to some degree.

The Economist’s glossary of terms makes the following comment regarding scarcity:

“Market forces operating through the price mechanism usually offer the most efficient way to
allocate scarce resources, with government planning playing at most a minor role. Scarcity does
not imply poverty.”

“In economic terms, it means simply that needs and wants exceed the resources available to meet
them, which is as common in rich countries as in poor ones.”

Efficiency

 criterion used by economists

 Common sense of the term is “ “lack of lack of waste” but we use a definition more but
we use a definition more precise

 The inability to make Efficiency: the inability to make someone better off without
making someone better off without making someone else worse off someone else worse
off

 A change is efficient if the gainers could potentially compensate the losers and
potentially compensate the losers and still come out ahead.
Why Efficiency Makes Sense

 The fact of scarcity implies we can’t have everything we want, so what we have
everything we want, so what we select should take into account what it select should take
into account what it costs

 Efficiency means getting the most value from our limited resources from our limited
resources

 What we want should be accomplished What we want should be accomplished at

minimum opportunity cost at minimum opportunity cost

Efficiency and/or Equity

Efficiency is the preview of economists, and equity is for all of us to judge

Equity does not necessarily mean equality

Equality of opportunity is fair (equitable) for most of us of us

Equality of income is probably not fair (inequitable) for most of us

If a change is efficient and equitable, it probably has already occurred probably has already
occurred

Most policy debate is about change that involves a tradeoff between these two involves a
tradeoff between these two objectives

How do we get what we want How do we get what we want efficiently?

Self-Cooperation is more efficient than self-sufficiency, so how do we insure sufficiency, so how

do we insure cooperation?

Cooperation and the nature of man

 Man as a benevolent actor

 Man as a self-Man as a self-interested actor
 The economist view is that man is motivated primarily by self-motivated primarily by
self-interest interest

Self Interest and Efficiency

Thomas Hobbs (1588 Thomas Hobbs (1588-1679) 1679) leviathan, 1651 1651

 “No arts, no letters, no society, and which is worst of all, continual fear and danger of
violent death, and the life of man solitary, poor, nasty, brutish, and short.”
 Advocated the submission to an absolute monarch to avoid the inevitable conflict and
chaos resulting from the uncontrolled pursuit of self-interest

Self Interest and Efficiency

Adam smith (1723-90) wealth of nations, 1776

 The invisible hand argument

 Policy of laissez faire French “allow to act” commonly taken to mean minimum
government

Production – Possibility Frontier

This explains the number of possibilities for production keep certain factors as unchanged.

Assumptions
• Scarce input and technology
• Considering an economy which produces only two economic goods
• Economy is having full employment

The production possibility frontier shows the maximum amounts of production that can be
obtained by an economy, given its technological knowledge and quantity of inputs available. The
PPF represents the menu of goods and services available to society.

Production possibilities frontier (PPF) A curve showing all combinations of two goods that can
be produced with the resources and technology currently available.

Utility/Benefits of PPF

 Helps in economy’s choice between current consumption goods and investment or capital
goods
 At times also shows the crucial economic notion of tradeoffs
 We can see opportunity cost even more clearly in Figure 2, where the data in Table 2 has been
plotted on a graph. In the figure, tank production is measured along the horizontal axis, and
wheat production along the vertical axis. Each of the six points labeled A through F corresponds
to a combination of the two goods as given by one of the rows of the table. For example, point B
represents the combination in the second row: 1,000 tanks and 950,000 bushels of wheat. When
we connect these points with a smooth line, we get a curve called society’s production
possibilities frontier (PPF). Specifically, this PPF tells us the maximum quantity of wheat that
can be produced for each quantity of tanks produced. Alternatively, it tells us the maximum
number of tanks that can be produced for each different quantity of wheat. Positions outside the
frontier are unattainable with the technology and resources at the economy’s disposal.

Society’s choices are limited to points on or inside the PPF. Now recall our earlier example of a
change in production in Table 2: When tank production increased from 1,000 to 2,000, wheat
production decreased from 950,000 to 850,000. In the graph, this change would be represented
by a movement along the PPF from point B to point C. We’re moving rightward (1,000 more
tanks) and also downward (100,000 fewer bushels of wheat). Thus, the opportunity cost of 1,000
more tanks can be viewed as the vertical drop along the PPF as we move from point B to point
C.

Production possibilities
Mythica, which is a hypothetical economy, produces only two goods – textbooks and computers.
When it uses all of its resources, it can produce five million computers and fifty five million
textbooks. In fact, it can produce all the following combinations of computers and books.

COMPUTERS TEXTBOOKS
(m) (m)

0 70

1 69

2 68

3 65

4 60

5 55

6 48

7 39

8 24

9 0

These combinations can also be shown graphically, the result being a production possibility
frontier. The production possibility frontier (PPF) for computers and textbooks is shown here.
Interpreting PPFs
Firstly, we can describe the opportunity cost to Mythica of producing a given output of
computers or textbooks. For example, If Mythica produces 3m computers; the opportunity cost is
5m textbooks. This is the difference between the maximum output of textbooks that can be
produced if no computers are produced (which is 70m) and the number of textbooks that can be
produced if 3m computers are produced (which is 65m). Similarly, the opportunity cost of
producing 7m computers is 31m textbooks – which is 70 – 39.

PPFs can also illustrate the opportunity cost of a change in the quantity produced of one good.
For example, suppose Mythica currently produces 3 million computers and 65m textbooks. We
can calculate the opportunity cost to Mythica if it decides to increase production from 3 million
computers to 7 million, shown on the PPF as a movement from point A to point B.  And
textbooks is shown here.

The result is a loss of output of 26 million textbooks (from 65 to 39m). Hence, the opportunity
cost to Mythica of this decision can be expressed as 26m textbooks. In fact, this is the same as
comparing the static opportunity cost of producing 3m computers (5m textbooks) and 7m
computers (31m textbooks).

Pareto efficiency
Any point on a PPF, such as points ‘A’ and ‘B’, is said to be efficient and indicates that an
economy’s scarce resources are being fully employed. This is also called Pareto efficiency, after
Italian economist Vilfredo Pareto. Any point inside the PPF, such as point ‘X’ is said to be
inefficient because output could be greater from the economy’s existing resources.
Any point outside the PPF, such as point ‘Z’, is impossible with the economy’s current scarce
resources, but it may be an objective for the future. Pareto efficiency can be looked at in another
way – when the only way to make someone better off is to make someone else worse off. In
other words, Pareto efficiency means an economy is operating at its full potential, and no more
output can be produced from its existing resources.

Pareto efficiency is unlikely to be achieved in the real world because of various rigidities and
imperfections.  For example, it is unlikely that all resources can be fully employed at any given
point in time because some workers may be in the process of training, or in the process of
searching for a new job. While searching for work, or being trained, they are unproductive.
Similarly, an entrepreneur may have wound-up one business venture, and be in the process of
setting-up a new one, but during this period, they are unproductive. Despite this, Pareto
efficiency is still an extremely useful concept.

It is a useful concept for two reasons:

1. It can be an objective for an economy because it can set a direction towards which an economy
can move.
2. It can help highlight the imperfections and rigidities that exist in an economy and prevent Pareto
efficiency being achieved.

Productive and allocative efficiency

A point on a PPF is, by definition, productively efficient in that all of the economies resources
are being fully employed, and there is no waste or unemployment. However, from the
consumer’s (or society’s) point of view a particular combination of goods may not be
allocatively efficient. For it to be allocatively efficient it must satisfy consumer demand and
consumer preferences. As will be seen later, allocative efficiency is more formally expressed as a
level of output where the marginal benefit to the consumer or the last unit consumed equals the
marginal cost of supply of that unit. Clearly, not all combinations will satisfy this condition.

In the example shown, a society may produce only meat or vegetables, but its population prefers
a varied diet. Hence, point A is likely to be much more allocatively efficient than point B and C,
because these do not meet society’s preferences.

Increasing opportunity cost

Opportunity cost can be thought of in terms of how decisions to increase the production of an
extra, marginal, unit of one good leads to a decrease in the production of another good.
According to economic theory, successive increases in the production of one good will lead to an
increasing sacrifice in terms of a reduction in the other good. For example, as an economy tries
to increase the production of good X, such as cameras, it must sacrifice more of the other good,
Y, such as mobile phones.

This explains why the PPF is concave to the origin, meaning its is bowed outwards. For example,
if an economy initially produces at A, with 8m phones and 10m cameras (to 20m), and then
increases output of cameras by 10m, it must sacrifice 1m phones, and it moves to point B.

If it now wishes to increase output of cameras by a further 10m (to 30m) it must sacrifice 2m
phones, rather than 1m, and it moves to point C; hence, opportunity cost increases the more a
good is produced.

The gradient of the PPF gets steeper as more cameras are produced, indicating a greater sacrifice
in terms of mobile phones foregone.
Marginal analysis

Economic decisions are taken in a marginal way, which means that decisions to produce, or
consume, are made one at a time.

For example, a typical consumer does not decide to drink four cans of cola at the beginning of
each day, rather they make four individual decisions, one at a time. Similarly, a baker does not
decide to produce 5,000 loaves of bread in a year, but decides each day or week what to produce.
Economic decisions are marginal because conditions are constantly changing, and consumers
and producers would be highly irrational if they did not consider this. Hence, each production or
consumption decision is assumed to be made one at a time so that changing conditions can be
assessed.

Why Society Must Choose

In Welcome to Economics! We learned that every society faces the problem of scarcity, where
limited resources conflict with unlimited needs and wants. The production possibilities curve
illustrates the choices involved in this dilemma.
Every economy faces two situations in which it may be able to expand consumption of all goods.
In the first case, a society may discover that it has been using its resources inefficiently, in which
case by improving efficiency and producing on the production possibilities frontier, it can have
more of all goods (or at least more of some and less of none). In the second case, as resources
grow over a period of years (e.g., more labor and more capital), the economy grows. As it does,
the production possibilities frontier for a society will tend to shift outward and society will be
able to afford more of all goods.

However, improvements in productive efficiency take time to discover and implement, and
economic growth happens only gradually. Thus, a society must choose between tradeoffs in the
present. For government, this process often involves trying to identify where additional spending
could do the most good and where reductions in spending would do the least harm. At the
individual and firm level, the market economy coordinates a process in which firms seek to
produce goods and services in the quantity, quality, and price that people want. However, for
both the government and the market economy in the short term, increases in production of one
good typically mean offsetting decreases somewhere else in the economy.

The PPF and Comparative Advantage

While every society must choose how much of each good or service it should produce, it does
not need to produce every single good it consumes. Often how much of a good a country decides
to produce depends on how expensive it is to produce it versus buying it from a different
country. As we saw earlier, the curvature of a country’s PPF gives us information about the
tradeoff between devoting resources to producing one good versus another. In particular, its
slope gives the opportunity cost of producing one more unit of the good in the x-axis in terms of
the other good (in the y-axis). Countries tend to have different opportunity costs of producing a
specific good, either because of different climates, geography, technology, or skills.

Suppose two countries, the US and Brazil, need to decide how much they will produce of two
crops: sugar cane and wheat. Due to its climatic conditions, Brazil can produce quite a bit of
sugar cane per acre but not much wheat. Conversely, the U.S. can produce large amounts of
wheat per acre, but not much sugar cane. Clearly, Brazil has a lower opportunity cost of
producing sugar cane (in terms of wheat) than the U.S. The reverse is also true: the U.S. has a
lower opportunity cost of producing wheat than Brazil. We illustrate this by the PPFs of the two
countries in Figure.

Production Possibility Frontier for the U.S. and Brazil The U.S. PPF is flatter than the Brazil PPF
implying that the opportunity cost of wheat in terms of sugar cane is lower in the U.S. than in
Brazil. Conversely, the opportunity cost of sugar cane is lower in Brazil. The U.S. has
comparative advantage in wheat and Brazil has comparative advantage in sugar cane.

When a country can produce a good at a lower opportunity cost than another country, we say that
this country has a comparative advantage in that good. Comparative advantage is not the same as
absolute advantage, which is when a country can produce more of a good. In our example, Brazil
has an absolute advantage in sugar cane and the U.S. has an absolute advantage in wheat. One
can easily see this with a simple observation of the extreme production points in the PPFs of the
two countries. If Brazil devoted all of its resources to producing wheat, it would be producing at
point A. If however it had devoted all of its resources to producing sugar cane instead, it would
be producing a much larger amount than the U.S., at point B.

The slope of the PPF gives the opportunity cost of producing an additional unit of wheat. While
the slope is not constant throughout the PPFs, it is quite apparent that the PPF in Brazil is much
steeper than in the U.S., and therefore the opportunity cost of wheat generally higher in Brazil. In
the chapter on International Trade you will learn that countries’ differences in comparative
advantage determine which goods they will choose to produce and trade. When countries engage
in trade, they specialize in the production of the goods in which they have comparative
advantage, and trade part of that production for goods in which they do not have comparative
advantage. With trade, manufacturers produce goods where the opportunity cost is lowest, so
total production increases, benefiting both trading parties.

References

ECONOMICS Nineteenth Edition PAUL A. S AMUELSON Institute Professor Emeritus

(Massachusetts Institute of Technology)

WILLIAM D. NORDHAUS Sterling Professor of Economics (Yale University)

https://opened.cuny.edu/courseware/lesson/493/overview