(a) Using the production possibility curve, explain the concepts of scarcity, choice and opportunity cost. [10]

(a) The concepts of scarcity, choice and opportunity cost can be explained with reference to the production possibility curve. Scarcity leads to choice and choice leads to opportunity cost. Although factor inputs are finite, human wants are infinite which leads to the problem of scarcity. Scarcity is the situation where finite factor inputs are insufficient to produce goods and services to satisfy infinite human wants. Scarcity necessitates choice. In other words, due to scarcity, society must choose what goods and services to produce. The opportunity cost of a course of action is the benefit forgone by not choosing its next best alternative. When a choice is made, an opportunity cost is incurred. In other words, when society chooses what goods and services to produce, it is choosing what goods and services not to produce. The production possibility curve (PPC) reflects scarcity, choice and opportunity cost. Suppose that there are only two goods produced in the economy. The PPC shows all the different combinations of the two goods that can be produced in the economy when factor inputs are fully and efficiently employed, given the state of the technology.

The above diagram is the PPC. Although the points inside and on the PPC are attainable, the points outside the PPC are not. Scarcity is reflected by the unattainable points that lie outside the PPC, such as point A and point B. The PPC is a series of points rather than a single point. Choice is reflected by the need for society to choose among the series of points on the PPC, such as point C and point D. The PPC is downward-sloping. Opportunity cost is reflected by the negative gradient of the PPC. An outward shift in the PPC is due to an increase in the production capacity in the economy and this will make some of the previously unattainable points attainable which will lead to a decrease in scarcity. The production capacity in the economy could increase due to an increase in the amount or the productivity of factor inputs. A movement along the PPC is due to a change in the tastes and preferences of society which means a change in choice. The PPC is concave to the origin because the opportunity cost of producing each good increases as its quantity increases as factor inputs are not equally suitable for producing different goods. As the economy produces more and more of a good, it has to use factor inputs that are less and less suitable for producing the good to actually produce the good. This means that increasingly more units of factor inputs are needed to produce each additional unit of the good. Therefore, increasingly more units of other goods have to be given up to produce each additional unit of the good. In conclusion, the government should continually shift the PPC outwards to increase the welfare of society.