Essay explaining the quantities of goods and services that we can produce with limited available resources The fundamental problem of economics is scarcity meaning economic resources are insufficient to meet the daily needs and wants of the individuals. Economic resources refer to the factors of production, which includes the following Natural Resources, Labour, capital and Entrepreneurship. The scarcity of resources is fundamental to economics. There are not enough resources to meet the needs of consumers and produce. There is not enough to go around satisfying the potential demand.
In the case of producers, there are four scarce resources: (i) (ii) natural resources capital-e. g. equipment and tools (ii) labor (iv) enterprise or entrepreneurship Scarce resources mean that producers cannot make unlimited quantities of goods and services. These are types of resources or factor of production. Since resources for production are scarce and there are not enough goods and services to satisfy the total potential demand, choices must be made. Choice is necessary because resources are scarce. Producers must choose how to use their available resources and what to produce with them.
Suppose, to take a simple dimensional example that a society can spend its money on two products, computers and cabbage. The society’s resources are limited; therefore there are restrictions on the amount of computers and cabbage that can be made, which can be shown by a production possibility curve or transformation curve. By devoting all our time and other resources to manufacturing computers, we can produce 5 computers per working day. On the other hand, if we spend all our production time gardening, we can produce 100 kilograms of cabbages per working day.
It is possible for us to produce either 5 computers or 100 kilograms of cabbage, but in each case the entire production of the other good must be sacrificed. The only way that we can enjoy both which includes both computers and cabbage is by using some of our resources for computer production, and some for cabbage production. Resources must be shifted from one production possibility to produce the other. By experimentation, we find that it is possible for us to produce any of the combinations shown in Table 1. 1.
These combinations represent the maximum amounts which can be produced with all the available resources. If we decide to produce combination E, we will be able to produce 4 computers and 40 kilograms of cabbage per day. But in producing this combination we have had to decide not to produce more computers or more cabbages. In producing 4 computers, we have had to forgo the additional 60 kilograms of cabbage which we could have produced if we had used all our resources to grow cabbage. Likewise, in producing 40 kilograms of cabbage we have decided to forgo the extra (5th) computer which we might have produced.
The opportunity cost of producing the 40 kilograms of cabbage is the computer; and the opportunity cost of producing the 4 computers is 60 kilograms of cabbage that have to be forgone. We therefore have to choose between more cabbage and fewer computers or more computers and less cabbage. Given the available resources, it is impossible to produce more of one good without decreasing the production of the other good. The different alternatives can be illustrated graphically in a production possibilities curve as in Figure 3.
The curve shows the possible levels of output in an economy with limited resources and fixed production techniques. FIGURE 3 Computer production is measured along the horizontal axis and cabbage production on the vertical axis. The combinations in the table are represented by points A, B, C, D, E and F in the diagram. This actually implies that there are also other possible combinations apart from the six that are given. The production possibilities curve indicates the combinations of any two goods or services that are attainable when our resources are fully and efficiently employed.
As we move along the production possibilities curve from point A to point B through to point F, the production of computers increases while the production of cabbages decreases. To produce the first computer, we have to sacrifice 5 kilograms of cabbages (from 100 to 95). To produce the second computer the sacrifice is an additional 10 kilograms of cabbages (the difference between 95 and 85). To produce the third computer an additional 15 kilograms of cabbages have to be forgone (the difference between 85 and 70).
The opportunity cost of each additional computer therefore increases as we move along the production possibilities curve. This is why the curve bulges outwards from the origin. In technical terms we say that the curve is concave to the origin. The production possibilities curve is a very useful way of illustrating scarcity, choice and opportunity cost. Scarcity is illustrated by the fact that all points to the right of the curve (such as G) are unattainable. The curve thus forms a frontier or boundary between what is possible and what is not possible.
Choice is illustrated by the need to choose among the available combinations along the curve. Opportunity cost is illustrated by what we refer to as the negative slope of the curve, which means that more of one good can only be obtained by sacrificing the other good. Opportunity cost therefore involves what we call a trade-off between the two goods. A person’s marginal benefit is the maximum amount they are willing to pay to consume that additional unit of a good or service. In a normal situation, the marginal benefit will decrease as consumption increases. (Samuelson and Nordhaus 2010:13:14) and (Mohr and Fourie, 2008:7:9)