Economics: Basic Economic Issues

Scarcity and Choice, Allocation of Resources and PPC

Scarcity and choice are the basic problems in economics. This concept was introduced by Prof. Lionel Robbins, a British economist as well as s a member of London school of economics, in the decade of 1903s.

Scarcity

Scarcity refers to the unavailability of a certain commodity in the market. The conceptual meaning of scarcity, in economics is different. A commodity is a scare, in an economic sense not because it is rare or unavailable in the market, but because the means to have are limited. We have limited resources at our disposal, so there is a problem of scarcity. Human wants are unlimited but the resources to satisfy the human are limited.

We need goods and services to satisfy our wants. For this purpose, we need resources that may be classified as land, labor and capital which are limited in relation to their demand. For example, land can be used to raise agricultural crops, to construct factory, buildings, to layout parks, etc. Our wants are unlimited and the resources to satisfy them are limited. Scarcity explains the relation between the limited resources and unlimited want and need of the human beings and problem therein.

Thus, scarcity is at the heart of all economic problems. It reflects the imbalance between society's demand for resources and their supplies. Since human wants are unlimited and the resources available are limited, scarcity is perpetual and universal.

Choice

The choice is involved in economic activities at both consumption and production levels. It also concerns individual and the state. The problem of choice begins with an individual, liking of how much time he would allot for work and how much for leisure. At the same time the more he work, the more he earns. On the income earned, the choice is between how much to consume and how much to save. Choice in consumption means what to buy.

Since the resources are scarce, society must decide which want will be satisfied and which want will not. Maximum satisfaction should be obtained by utilizing the productive resources that are available in a useful manner. Our choice has to be such that the most of our want be satisfied because the demand for the resources is more than their availability.

The stock of land in Nepal is limited. But land has alternative uses. If more wheat is to produce, the land has to be diverted from other uses (e.g. production of vegetables).

Allocation of Resources

Allocation of resources is defined as the process of selection of resources and their proper utilization. Various types of resources are required to produce goods and services.

The main problem relating to the proper allocation of the resources are explained as follows:

1. What to produce
   The first concern is related with what to produce? The problems such as what to produce are to be produced and in what quantities arise directly from the scarcity of resources. Production must meet the maximum social need as it is the first priority. The social norms and values should guide to maximize social satisfaction. The problem of what to produce and how much to produce depends on the necessity of the citizens of the country.
   
   
2. How to produce
   The second concern is related to the method of production. In some cases, labour may play a major role. It is called labour-intensive technology. It is called capital-intensive. Labour intensive method creates more jobs favouring more employment. Capital-intensive production goes for a large volume of production. The right decision depends on the current state of the economy.
   
   
3. For whom to produce
   It can be expressed as how to distribute society is total product among its different units? Or, how the total national product distributed among the different factors of production or among the different individuals and families? The distribution of the output of society among its various members must be determined.
   
   
4. Balance in Development
   While allocating the resource, a nation must give the priority to maintain the sector balance in development. The balance between rural and urban, consumer goods and exported goods, balance in the sector of development (primary, secondary, tertiary sector).
   
   

Production Possibility Curve (PPC)

Production is the creation of utility. It transfers raw materials into goods and services. Due to the scarcity of resources, we cannot produce the unlimited want of production. If all the resources are used to produce only one commodity then there will be no more resources for the next commodity. In order to manufacture the goods, the resources must be allocated.

Production possibility curve (PPC) represents the maximum amount of a pair of goods or service that can both produce with an economy is given resources and technique, assuming that all resources are fully employed. The PPC is the graphical presentation of alternative production possibilities in an economy. It is also called as production possibility boundary or frontier because it shows the limit of what it is possible to produce with the available limited resources. Some of the assumptions of PPC are given below:-

1. An economy is producing only two goods.
2. There is full employment.
3. The technology used in the production is constant.
4. Factors of production are given and fix.
5. The time period is given and fix.

The PPC can be explained with the help of the following table

The above table illustrates the production of any two commodities as good 'x' and good 'y'. When all the resources are used to produce goods 'y' only a producer can produce 15 units of goods without the production of good 'x'. If the production is obtained from 'F' then 5 units of 'x' good will be produced without the production of 'y' goods. Besides these, there are many possibilities of production such as B, C, D and E and A to B, B to C and so on shows that the production of goods 'x' steps up. This PPC can be shown in the following graph.

In the figure good 'x' are represented on the x-axis and good 'y' on the y-axis. AF is the production possibility curve (PPC) which is made by joining various points. A, B, C, D, E and F. It slopes concave to the origin because of the operation law of increasing marginal rate of technical substitution. The sacrificing rate of good 'y' goes on increasing as the production od good 'x' increases.

Shifting of PPC

The PPC shifts left-hand side and right-hand side. The right hand side shift PPC indicates an increase in production and left-hand side decrease in the production.Some of the reasons for shifting PPC are as below:

1. Change in resources
   When the supply of raw material increases the production also increases so the PPC shift upward. And if decreases than PPC shift downward.
   
   
2. Change in the efficiency of labour
   When the efficiency of labour increases by any means the production can be increased with the PPC shift upward. And if decreases then PPC shifts downward.
   
   
3. Change in Technology
   When the advance technology is used instead of traditional technology in the production prices the production capacity increase & PPC shift upward. And if the traditional technology is used instead of advanced technology then the PPC curve shift downward.
   
   
4. Change in Investment
   When the investment increase in the production the production also increases so, the PPC shifts upward. And when investment decreases PPC curve slopes downward.