Question

Explain in detail an example of scarcity, choice and opportunity cost from your own life. How can tradeoffs such as these can be illustrated by the Production Possibilities Frontier Model? Be sure to explain the graph in detail and how it relates to your analysis.

200 word

Answer 1

Scarcity is a situation when demand for a good exceeds its supply even at zero price. Example: In a government hospital, medicines may be given to the patients free of charge. Still, demand for medicines may exceeds their supply. It is a situation of scarcity.

Choice is the consequence of scarcity. Choice emerges when limited resources are to be used for the satisfaction of unlimited wants. A rupee cannot buy 10 things when price of each thing is Rs. 1. You have to choose the thing you would prefer to have. Choosing 1 alternative and not choosing other alternative is a problem of choice.

Opportunity cost is the value of next best alternative foregone. It refers to the value of a factor in its next best alternative use. Opportunity cost of opting for higher studies rather than a job is the amount of wage or salary the person would have earned in a job.

PPC is a curve showing alternative production possibilities of two goods with the given resources and technique of production. It is also called production possibility boundary or production possibility frontier.

Each point on PPC shows a combination of output of rice and wheat which can be produced with the given resources and given technology. Moving along the PPC from left to the right shows how much of rice is to be sacrificed for producing an additional unit of wheat. Thus, when we move from B to C, 4 units of rice are to be sacrificed for producing 2 more units of wheat. Implying that 2 units of rice are to be sacrificed for producing one more unit of wheat (moving from B to C).