Wants and Resources

Scarcity means that society has limited

resources and therefore cannot produce
all the goods and services people wish to
have.
Trade-off: Society faces trade-off between
efficiency and equality.
1

Scarcity, Choice,
and Opportunity Cost

Limited Resources & Unlimited Wants

Scarcity
Choices
Opportunity Cost

Production Possibility Frontier

The production possibilities frontier is a graph
that shows the combinations of output that the
economy can possibly produce given the
available factors of production and the available
production technology.

Production Possibility Frontier

Assumptions
Scarce input and technology
Considering an economy which produces
only two economic goods
Economy is having full employment

People must make choices because of scarcity. If there were

no scarcity, there would be no need to study economics.
Scarcity:
Becauseofscarcity,anyuseofresourceshasanopportunitycost.
Opportunity Cost is the next best alternative use of your resources (or
inputs)
Moregenerally:Whatyougiveupwhenyoumakeachoice
Examples:
WhatistheOpportunityCostofcomingtothisclass?
WhatistheOpportunityCostofgoingtoMovie?
Wewantmorethanthereis
Wheneverapersonorasocietywantsmorethantheyhave,ormorethanthey
canproduce,thereisscarcity.
5

Scarcity means that we must choose among different

alternatives; we cannot have unlimited amounts of everything

Opportunity Cost
The opportunity cost of a chosen action is the loss of the
sacrificed alternative
Sacrificed money, time, and other stuff
The opportunity cost of buying a diamond necklace might be
a trip to Europe or purchasing a plot in Bangalore.
The opportunity cost of going to an 20-20 Cricket game
might be four hours of studying for the Economics Exam.

Example: Textbook costs $100

Pizza Pie costs $10
You have $300 to spend on textbooks & pizza pies
If you buy

40

0 books, you can buy 30 pizza pies

(0*$100 + 30*10 = $300)

1 book, you can buy 20 pizza pies
(1*$100 + 20*10 = $300)
The opp. cost of buying one textbook is the loss of 10
pizza pies
2 books, you can buy 10 pizza pies
(2*$100 + 10*$10 = $300)
The opp. cost of buying a second textbook is the loss
of 10 pizza pies
What happens if you buy 3 books?

30
PizzaPies

20
10
0
0

2
Textbooks

The production possibilities frontier (PPF) illustrates the

ideas of scarcity and opportunity cost

Production Possibilities Schedule for Tanks and Wheat

Opportunity
Cost of
Tanks
Tanks (tons
Combination (thousands) Wheat (tons)
of wheat)
a

18

17

15

12

Marginal Rate of Transformation : It is defined as the ratio of units of one good sacrificed for
production
of an additional unit of other good. The opportunity cost of one unit of tanks is also the marginal rate
8
of transformation (MRT). The MRT can change, as it does in this case. If you want to make more
tanks, you need to make less wheat

The Production Possibility Frontier is a graph that shows all

the combinations of goods (or services) that can be produced
at maximum efficiency

Production Possibilities Frontier for Tanks and Wheat

PPF

The line is the frontier.

All resources are being
used

20

Combinations of Tanks
and Wheat inside the
frontier are possible, but
inefficient

Wheat (Tons)

15
10

Combinations of
Tanks and Wheat
outside the frontier
are not possible

5
0
0

Tanks (Thousands)

When an economy is inside its PPF, it is operating

inefficiently

Point A is on the PPF:

PPF

15 tons of Wheat, 2
thousand Tanks

20

15 tons of Wheat, 1
thousand Tanks

Wheat (Tons)

Point B is inefficient:

15

A
C

10

Point C is inefficient:
5

10 tons of Wheat, 2
thousand Tanks

0
0

Note
negative
slope!

Tanks (Thousands)

10
Reasons for inside shift of PPF
#Business cycle and depression
#Inefficiency and dislocation, strikes, political changes and revolution

Economies must choose how they want to allocate resources

efficiently

To Eat or To War? A Normative Question

PPF
20
15
Wheat (Tons)

We can make lots of

food, but be vulnerable
to attack

10
5

We can be militarily
strong, but be very
hungry

0
0

Tanks (Thousands)

11

Economic growth pushes the PPF out better combinations are

possible.
Economic growth - Means pushing out the PPF. The two key factors
that influence economic growth are technological progress and capital
accumulation.
PPF with new Wheat-making technology
PPF
60

The old PPF

Wheat (Tons)

50

The new PPF, with

growth in Wheat-making
possibilities

40
30
20
10
0
0

Tanks (Thousands)

12

The production
possibility curve

The production possibility curve illustrates the

principle of opportunity cost (shows the crucial

economic notion of tradeoffs)

The production possibility curve can be used to

illustrate the production possibilities for an entire
economy.
The production possibility curve helps in economys

choice between current consumption goods and

investment or capital goods

The production possibility curve can be

illustrate the production possibilities
individual or a firm.

used to
for an

The production possibility curve shows all possible

combinations of goods and services 13that can be
produced with a given set of resources.