1.3 scarcity & the competing use of resources

• scarcity refers to the fundamental problem that resources are limited while human wants are virtually unlimited. This forces societies to make choices about how to allocate these limited resources to satisfy as many needs as possible.
• The PPF is a curve that shows the maximum combinations of two goods that can be produced with the available resources.
• The opportunity cost of producing more films is the amount of food sacrificed to reallocate workers.
• The PPC / PPF shows : 

  • The maximum possible production of 2 goods / services with given factors of production 
  • The various combinations of 2 goods / services that can be produced with given factors of production
• The law of increasing opportunity cost:

  As you continue to increase production of one good, the opportunity cost of producing that next unit increases.
• PPFs that are bowed out & concave show the law of increasing opportunity cost
• PPFs that are linear show constant opportunity cost 
• Any point on the curve is productively efficient & pareto efficient
• Any point inside the curve is productively inefficient - this may indicate unemployment (on a macro level)
• Any point outside the curve is unattainable
• Pareto efficiency means that one person becomes worse off in order for someone else to become better off.
• To increase production : 

  • If they are under the curve they can ensure they use all the factors of production 
  • They can reallocate the factors of production 
• • to make the curve shift they can increase the quantity and quality of factors of production 
  • They can increase the technology used to increase efficiency 
• Scarcity refers to the basic economic problem where limited resources must be allocated among competing uses.
• Law of diminishing marginal returns:

  If you keep adding more of one thing (like workers) while keeping everything else the same (amount of machines or space), each new worker will add less & less to the total output.
• At first adding more helps but eventually it doesn’t help

  This is why the curve is concave as more resources  are shifted from y to x, the y output decreases faster, while x output increases at a diminishing rate.
• PPFs shows : 

  • The trade-offs between producing two goods, the economy can make more of one good but only by reducing the production of the other. 
• How to identify the opportunity cost:

  • By finding the slope of the PPF at any point
  • Tells us the opportunity cost of one good in terms of the other 
• Production Efficiency means that an economy is producing on the PPF curve. This is the point where no more of one good can be produced without sacrificing production of another good.
• When a country experiences economic growth, the PPF shifts outward. This means that with the same amount of resources, the economy can produce more goods and services.
• Technological progress, can shift the PPF outward, allowing more of both goods to be produced.
• At the beginning: When you shift resources from producing one good (say, Good A) to another good (Good B), the initial units of resources are highly efficient at producing Good B. The opportunity cost (how much of Good A you give up) is low.
• Later: As you keep reallocating more and more resources to Good B, you start using less efficient resources. The output of Good B increases, but at a decreasing rate, meaning the opportunity cost of giving up Good A rises. This results in diminishing marginal returns.