Question

With an aid of a diagram, discuss the concept of scarcity, opportunity cost and unemployment for a hypothetical economy producing cars and potatoes

Answer 1

To explain this, we use the production possibility curve.

PPC shows the various combinations of the amounts of two goods which can be produced in a country with given resources and technology at a time.

Since, it is a two good economy, consider units of cars on the x axis and those of potatoes on y axis.

Scarcity: Any movement on the surface of PPC indicates scarcity. Refer to the graph, when we move from point A to B, units of cars are increased from C₀ to C₁, we see that the units of potatoes produced reduces from P₁ to P₀. This is because of the scarcity or limited availability of resources that to increase production of cars we have to reduce production of potatoes.

Opportunity Cost: Opportunity cost is the benefit we forego when we decide to choose one option instead of another. Refer to the graph, opportunity cost is justified by the downward sloping PPC which indicates that to increase production of one good we have to forego some units of another.

Say, at point B, we are producing 20 cars and 1000 potatoes, however we wish to produce 5000 potatoes, for that we will have to go to point A where only 10 cars are being produced, so opportunity of 4000 more potatoes is 10 cars.

Unemployment: The situation of unemployment arises when some resources are not being utilised to produce goods. Unemployment can be represented by any point inside of the PPC from where we have potential to produce more and reach anywhere on the PPC. U and Z are such points in the figure. There can be infintely more such points.