Economics Resources, Scarcity, Production Possibilty Curve And Opportunity Cost. Essay, Research Paper

There are four main types of resources available for use in production, land, labour, capitol and enterprise. These resources are scarce due to the fact that wants are unlimited. Since all wants cannot be satisfied, we have to make choices in what to buy. A production possibility curve can be used to illustrate the economic problem. With advances in technology and expanding resources, the production possibility curve will move over time.

Resources are known as factors of production and there are four of them:

1. Land, refers to all resources provided by nature for mankind’s use. It includes forests, oil and mineral deposits, farmland, soil, fishing grounds and water resources. Land is not confined to its everyday usage. It means more than just a home site, a farm, or a place to build a factory. In order to be productive, however, land requires the application and assistance of the other factors. That is, before land can produce goods and services, it must be combined with labour, capital and enterprise.

2. Labour, which includes all forms of human effort used in the production process, both physical and mental. The quality of labour is determined by various factors such as the level of education and training, the ability and willingness to work, and the size of the workforce. Like land, labour is regarded as a passive factor of production. That is, labour must be organised and combined with other factors to produce goods and services.

3. Capitol, which includes all manufactured goods, which have been produced for the purpose of assisting with the production of final goods and services, also referred to as “producer goods”. These include machinery, factory buildings, and computers. Capitol goods are man-made. For this reason, capital is often defined as produced means of production. Moreover, because they are used by firms in conjunction with other factors, they are sometimes called producer goods.

By this definition, money is not capitol.

The two subgroups of capitol are:

1. Social Overhead Capitol, or infrastructure, is an investment usually provided by the public sector, which enables the economy to function effectively. These include communications, transportation and the road and rail network.

2. Intermediate Capitol Goods, are goods that are produced to be a component of a final good.

4. Enterprise, or entrepreneurial ability, is the ability to organise the other factors of production for the purpose of producing and selling goods and services. The individual who possesses this ability is called the entrepreneur. An entrepreneur is one of a limited number of individuals with talent, drive and initiative who makes decisions and bears the risks involved in running the firm.

Scarcity arises because wants are unlimited, while resources used to satisfy wants are limited. Resources are insufficient to produce all the goods and services required to satisfy all the wants of the people. That is relative scarcity. Scarcity is considered a relative concept because while some societies and individuals are able to satisfy more of their wants than others, all societies and individuals suffer from relative scarcity.

The scarcity of resources in relation to wants is referred to as the economic problem, the fact that all wants are unlimited. The economic problem brings about the need for choice since all wants cannot be satisfied. To satisfy any want, something else must remain unsatisfied – this is referred to as opportunity cost (also known as real cost). In other words, opportunity cost is the actual goods and services foregone in order to satisfy a particular want. In order to maximize individual satisfaction, firms and governments must have a scale of preferences – satisfy the wants considered the most urgent first. The idea is to maximize satisfaction and minimise opportunity cost. For example, a person who has $20 may want a new shirt or book. He or she decides to buy the shirt, so the opportunity cost is the value of the book.

Production is any activity undertaken to satisfy the wants of humans. Satisfaction of wants requires people to undertake consumption. Single use goods are used up immediately when consumed, such as food, while other goods are durable and can be consumed over a period of time, for example a television. Factors of production have various uses and their use in the production of one good or service is at the expense of something else using the resources. In deciding how to use resources, we are allocating them. Efficient allocation of resources is very important for society. We can illustrate the economic problem, along with the concepts of opportunity cost and efficient resource allocation, with a production possibility curve. A production possibility curve can be used to illustrate the fact that choices have to be made about resource use. It is a simplified model based on the following assumptions.

1. All resources are fully employed. This means that all available resources are used in the production process. This allows society to achieve an efficient allocation of its resources. Society is thus in a position to realise the maximum possible satisfaction of its wants.

2. All resources are fixed in supply and can be easily transferred from production of one good to the production of another.

3. The level of technology is constant.

4. Society only produces two types of goods, capitol and consumer.

Capitol goods are the produced means of production. Since they assist in the future production of goods, they are said to be future wants. They satisfy wants indirectly.

Consumer goods are used by individuals and households to satisfy their present wants. That is, consumer goods provide for immediate want satisfaction. They satisfy want directly.

This assumption is very unrealistic as any modern economy produces thousands of goods and services, and the choices made between these are quite complex.

The above graphic represents a production possibilities schedule of four alternative combinations of bread and ovens available to society. This is a table, which represents the maximum possible combinations of two goods which society might choose to produce at any point of time.

Society can only produce one alternative, that is a combination of bread and ovens, at a time. If we graph the data shown in the table, plotting bread on the vertical axis and ovens on the horizontal axis, we have a production possibility curve (PPC). Each point on the curve represents a maximum possible combination of bread and ovens which society may choose to produce. Sometimes, the PPC is called a production possibilities frontier because it shows the farthest limits to which society’s total output of goods and services may be pushed at any given time.

Society is unlikely to produce at alternative A or D, the extremities. In both cases, society is producing one hundred percent of one good and none of the other. There needs to be a balance, so that some goods can be produced in the future. If there is only a lot of bread now, there will be no ovens to bake bread in the future. By producing all capital goods now, that is ovens, there will be no bread to eat now. Alternatives B or C are the only proper choices.

If society is producing at alternative B, but then decides to move to alternative C, then the PPC moves. This movement involves an increase in oven production and a decline in bread production. The output of ovens increases from 15 to 45 and bread declines from 100 to 69 units. Therefore, if we are to produce an extra 30 ovens, we must sacrifice 40 units of bread. In other words, an opportunity cost is involved.

There are two main points involved with PPC in relation to opportunity cost. Firstly, when an economy is operating at full employment, it is only possible to increase the production of one good by sacrificing some of another. That is, at full employment, additional output always entails an opportunity cost. Secondly, in a fully employed economy, an increase in the production of capital goods can only take place at the expense of fewer consumer goods.

Over time, the amount of resources available to society tends to increase. The labour force grows as the population increases; the discovery of new minerals increases our supply of land and so on. The net result of an increase in the volume of its available resources is that society is now capable of producing a greater output of goods and services than before.

Technological advance is a feature of modern society. It leads to the introduction of new and better goods and services as well as better means of production. Technological progress improves the efficiency with which resources are used. It thereby enables society to produce more goods and services with the same volume of resources.

Thus if either resource supplies are expanding or technological progress is taking place, society is capable of increasing its total output of goods and services. Over time, as a result, its PPC will move out to the right. Society is thus capable of satisfying more of its wants. This increasing capacity of society to satisfy more of its wants is known as economic growth.

We can conclude that by expanding its resource supplies and improving its level of technology, the fully employed economy can increase its potential output of goods and services. In other words, the economy is capable of growth.