Question

Illustrate scarcity, opportunity cost, and economic growth within a PPF framework of analysis

Answer 1

A production possibility frontier shows the various combinations of production possibilities that can be attained by the full utilization of the country's resources at the given period of time.

PPF fully shows the concept of scarcity and oppprtunity cost.

We know that resources are scarce and available in limited nature. The combinations shown by PPF join together to form a concave curve. This curve divides the whole region in attainable and un-attainable region. This implies that we cannot produce beyond the boundry of PPF even if we employ all our resources. This highlights scarcity.

Similarly, PPF is drawn for a combination of goods. The downward sloping curve shows that even with the full utilization of resources, we cannot keep on producing more of all the goods. In order to produce more of one good, we need to free up the resources from the use for production of other cost. Now, PPF shows how much of one good needs to be sacrificed in order to produce an additional unit of the second good. This is the concept of opportunity cost.

Economic growth is also highlighted by PPF. If the economy is currently operating inside the PPF, it implies that it has not utilised its resources fully and has the potential to attain higher levels of growth. The economy operating on the PPF will have higher growth rates as it is fully utilising its resources.