CHAPTER # 2

Goods/resources:
Anything that provides satisfaction or utility is called goods/resources.

Characteristics of resources:
• They are scarce
• They have alternative uses.

Scarcity of resources
When demand for a resource exceeds its existing supply that resource is said to be
scarce.

Note: scarcity and shortage are the two different things. Shortage is a temporary
phenomenon i.e., when supply falls short of the demand temporarily.

The problem of scarcity leads to 3 issues (I) What (II) How (III) for whom to produce.

Alternative uses
When a man can satisfy more that one want with the same resource or can produce
more than one product from one resource then the resource is said to have alternative
uses.

Equilibrium:
It is a state when the economy is making full use of resources or when maximum goods
are produced.

Opportunity cost:
The cost of an item measured in term of the alternative forgone is called its opportunity cost.

Production possibility frontier (PPF):

Production possibility frontier (PPF) graphically represents the possibilities of producing

different combination of two goods by employing all the existing resources of an
economy most efficiently.

Assumptions:

• The economy is operating at full employment.

• Factors of production are fixed in supply;
• Technology remains the same.

Illustration:
Suppose that a society can spend its resources on two products, guns and food. The
society resources are limited. Therefore, there are restrictions on the amount of guns
and food that can be produced, which can be shown by PPF.

1
 Guns Production Possibilities Curve

G
P Technically
R Infeasible Area
G1
Ga

G2 Q
S
Gb
Productively
Inefficient Area

O
Fb F1 Fa F2 F Food

Figure 1 PPC for the Society

The curve from point A to B in figure 1 shows the various combinations of guns and food
that a society can make, if it uses its limited resources efficiently.

a) The society can choose to make

• G units of guns and no food;

2
 • F units of food and no guns ;
• G1 units of guns and F1 units of food point P on the curve
• G2 units of guns and F2 units of food point Q on the curve

b) The combination of (Ga, Fa) at point S is within the PPF showing inefficient utilization
of resources whereas combination (Gb, Fb) at point R is outside the PPF which is not
technically feasible or attainable by the economy by employing all its existing resources.

The PPF is an important idea in economics which illustrates the need to make a choice
about what to produce when it is not possible to have everything i.e. when there is
scarcity.

Shift in PPF:
Production possibility curve may shift due to changes in availability of resources or
development in technology.
• If the PPF moves outwards to the right, it is refer to as economic growth
• If the PPF moves inwards to the left, it means the economy cannot produce as
much as before