Question

1. Please describe how the PPC curve represents scarcity, choice and opportunity cost.

Answer 1

Explanation and elaboration on how the PPC reflect scarcity

An increase in the production capacity in the economy will lead to an outward shift in the PPC resulting in a decrease in scarcity and vice versa [point]. When the PPC shifts outwards, some of the previously unattainable points will become attainable. The production capacity in the economy could increase due to an increase in the quantity or the quality of factors of production [explanation and elaboration]. For instance, education and training which will lead to greater human capital will increase the skills and knowledge of labor and hence the production capacity in the economy, thus shifting the PPC outwards. [example].

Explanation on how the PPC reflect choice

A change in the tastes and preferences of society will lead to a movement along the PPC which reflects a change in choice [point]. The tastes and preferences of society may change due to technological advancements [explanation and elaboration]. For instance, the invention of the smartphone and tablet computing has led to a change in the tastes and preferences of society towards electronic publications. As such, the market may be more inclined to produce more electronic publications [example].

Explanation on how the PPC reflect opportunity cost

The PPC is concave to the origin because the opportunity cost of producing each good increases as its quantity increases [point]. This is because resources are not equally suitable for the production of different goods. As the economy produces more and more of a good, it has to use resources that are less and less suitable for producing the good to actually produce the good. Therefore, increasingly more units of other goods have to be given up to produce each additional unit of the good [explanation and elaboration]. For instance, a farmer has a plot of very arable land that can be used to grow strawberries. To increase production of the strawberries, the farmer may have to utilise surrounding plots of land which are less fertile. As a result, the yield of strawberries per acre of land would decrease. Thus, the PPC is concave [example].

In conclusion, the PPC relates to us the concepts of scarcity, choice and opportunity cost.