Scarcity and choice Flashcards
The problem of scarcity and the Economic problem
Over a period of time resourses are scarce and therefore only a finite amount can be produced. Scarcity means we have to decide how and what to produce from these limited resources. We have to allocate resources between competing users.
PPF
Production possibility frontier, the curve above shows the difference in combinations of economic goods which an economy is able to produce if all resources in the economy are efficiently and fully employed.
Oppurtunity cost
- The next best alternative forgone
Choice
The PPF by itsled gives no indication of which combination of goods will be produced in a economy. All it shows is the possible combinations which a economy can produce if resources were maxmised efficiently.
SO a economy has to chose…
What to produce, determined by what the consumer prefers. Consumers tell producers what they prefer by demanding goods and using their ‘spending
votes’.
How to produce it, producers seek profits and aim to minimise production
costs
For whom to produce it, whoever has the greatest purchasing power in the economy, and is therefore able to buy the good
Why are PPF curved?
- A straight line would indicated that the oppurtunity cost is constant, in reality the PPF is concave and not linear, this indiated increasing oppurtunity cost.
- This is because one economy may be better suited towards the production of product A opposed to product B, firms will begin by using the most efficient FOP at first, this means the oppurtuntity cost of producing product A will be low, as resources are reallocated towards producing product A, less and less suitable FOP are available for product B.
This is imperfect factor subsitutability, as we increase production of a good, less suitable FOP will be used. Therefore they yield less output. So the opportunity costs of using these factors of production, instead of using them for what they specialise in gets greater and greater.
Economic growth effect on PPF
If there is an increase in land, labour, capital or enterprise or an increase in the productivity of these factors than the PPF curve can shift out. The productive potential of the economy has increased.
Factors that shift PPF OUT
- Investment in new technology, more efficient therefore output will increase.
- Increases its labour force, growth in size of the labour force, potential output can increase. This can be achieved through natural growth, where birth rate exceeds death rate. Or it can be achieved through immigration increases.
- Discover new raw materials. E.G Oil
Factors that shift the PPF IN
- Resources will run out as they are finite, countries can over specialise at producing goods from non renewable energy sources.
- Fall in labour force size.
Specialisation and divison of labour
This refers to how production can be broken down into separate tasks, allowing labour to specialise in certain areas. There will be a increase in labour quality and productivity. Division of labour IMPROVES PRODUCTIVE CAPACITY and can shift the PPF OUTWARD.
- Workers can gain skills in a narrow range of tasks. These skills enable individual workers to be far more productive.
- Cost effective, and time is saved as the worker is not constantly changing tasks.
- Workers can specialise in tasks in which they are best suited.
Limits to the division of labour and specialisation
- Work could become monotonous If work is divided up too much, it may become boring and their productivity may fall as a result. High levels of specialisation could lead to possible diseconomies of scale.
- Over-specialisation, North of England have suffered high employment as their traditional manufacture industry such as coal mining declined and was not replaced with enough service sector jobs.
Short run economic growth PPF
A movement from within the PPF
What does a straight or linear PPF indicate
Perfect factor subsitutablity of resources
