Understanding Scarcity, Choice, and Resource AllocationWelcome to our third ever blog in our economics masterclass. Today we will be going over and Understanding Scarcity, Choice, and Resource Allocation.
[Section 1.4: Scarcity, Choice, and Allocation of Resources
The basic economic problem stems from scarcity, where wants are unlimited, but resources are finite, necessitating choices. Optimal utilization and distribution of resources are crucial.
For example, when you have only £1 to spend at a shop, you must choose between buying a chocolate bar or a packet of crisps due to the scarcity of money. This leads to the concept of opportunity cost, which is the value of the next best alternative foregone. The opportunity cost of choosing the crisps, in this case, would be the chocolate bar. Economic agents such as consumers, producers, and governments must consider opportunity costs when making decisions. Finite resources require careful allocation to achieve the best outcomes.
This section leads on nicely to our first ever some what complex economic theory.
Production Possibility Frontiers (PPFs)
Production Possibility Frontiers (PPFs) depict the maximum productive potential of an economy by using a combination of two goods or services when resources are fully and efficiently employed. PPF curves illustrate the opportunity cost associated with using scarce resources.
Below is an example of a PPF curve for Cheese and yoghurt
(tradingview dot com /chart/AAPL/rNnd689O-PPC-GRAPH)
An example could be, if milk is a scarce resource, there is a trade-off between producing more cheese or more yogurt from the milk. The PPF showcases the most efficient combinations of output (points A and B), where producing more yogurt incurs an opportunity cost of producing less cheese.
The law of diminishing returns states that as more yogurt is produced, the opportunity cost in terms of lost cheese units increases. Points C and D on the PPF represent inefficient production, where resources are not fully utilized. Point E is currently unattainable with the existing resources.
(tradingview dot com /chart/AAPL/YRb7mwU2-ppc-grpah-aks/)
This PPF shows the opportunity cost of producing each product. Producing 100 units of cheese means that only 40 units of yoghurt can be produced instead of the
potential of 90. Therefore, the opportunity cost is 90 - 40 = 50 units of yoghurt.
The PPF not only illustrates opportunity costs but can also indicate economic growth or decline. Economic growth is depicted by an outward shift of the PPF curve, indicating an increase in the economy's productive potential.
A decline in the economy is represented by an inward shift of the curve.
Economic growth can be achieved by increasing the quantity or quality of resources, resulting in an outward shift of the PPF curve.
Supply-side policies can facilitate this. Moving along the PPF incurs opportunity costs, while shifting the PPF curve outward reduces the opportunity cost of producing different goods.
Productive efficiency is achieved when resources are utilized optimally along the PPF curve, while allocative efficiency involves the optimal distribution of goods in society.
We have now covered every section for the first topic behind the A level spec for microeconomics!
4.1 Individuals, firms, markets and market failure ✅
4.1.1.1 Economic methodology ✅
4.1.1.2 The nature and purpose of economic activity ✅
4.1.1.3 Economic resources ✅
4.1.1.4 Scarcity, choice and the allocation of resources✅
4.1.1.5 Production possibility diagrams✅
