Question

Construct a neat production possibilities model of civilian and military goods, and use it to explain and illustrate the concepts of scarcity, choice and opportunity cost.  Note: You need to add the graph.

(b) Explain under what circumstances would a country operate inside its PPF

Answer 1

Production possibility model is graphical representation of different combination of two goods that can be produced in the economy/firm assuming

1.Technology remains constant
2.Resources are limited.
3.Resources are used to maximize capacity

PPF /PPC/ PP model for civilian and military goods .



The PPC for civilian and military goods and services shows the various combinations of these two types of output that the economy can produce using exactly all of the available resources.The PPC is convex outward because some of the economy's resources are better able to produce civilian goods  than military goods while other resources in the economy are better able to produce military goods and civilian goods. .
Point A shows OQ quantity of civilian goods and OT1 quantity of military goods. Similarly,Point C shows OQ1 quantity of civilian goods and OT quantity of military goods. Points inside the curve represent under utilization of resources.

The point where the PPC intersects the vertical axis is the point on the PPC where civilian output is zero.
(Point E ). Similarly, the point where the PPC intersects the horizontal axis shows the amount of civilian goods and services that can be produced if all the resources are devoted to its production.



Scarcity - IT means resources are finite and limited but their demand is ever increasing and the resources can be put to multiple uses . Therefore excess of demand over supply can be defined as scarcity .The shortage that exists when less of something is available than is wanted at a zero price. For eg - When there is no water in some Village areas when it is needed.The means to fulfill the ends are limited. This situation requires people to make decisions about how to allocate resources efficiently, in order to satisfy basic needs .It is because of this scarcity of resources that unlimited quantity of both the goods cannot be produced. As the resources are scarce ,an optimum combination of the two goods has to be chosen ,

Choice involves taking decisions as to what is to be done . Here it means the choice of where the limited resources should be spent to satisfy the chosen want. For eg you have 1 dollar and you need a pencil, chocolate, bread and a pen . Here a choice needs to be made as to what you will purchase.You have to choose to produce which combination of military and civilian goods should be produced. Whether to produce at point A , b or c or any any other point on the curve

Opportunity cost can be defined as the cost of the next best alternative or cost of the foregone alternative, It is the value of the benefit that has been lost due to choice of an alternative . For eg you have 2 job offers , JOB A gives you 80000$ and job B gives you 60000$ . The opportunity cost of choosing Job A is the value of benefit that you have earned through job B . Therefore the opportunity cost is 60000$.
For eg in the above diagram to produce an additional unit of civilian good you have to sacrifice some quantity of military goods. Eg there are two point A and E .. the opportunity cost of producing at Point A is the foregone quantity ET1 of military goods.

B) Conditions under which a country may operate inside PPF

1) Lack of innovative technology to harness additional potential
2) Underutlisation of resources
3) war like situation that may not allow access to some resources
4) Contracts restricting rights to resources
5) Resource contamination
6) During the periods of recession and depression when demand is low
7)Rising opportunity costs mat prompt to restrict production of additional units.