Downloaded from: www.bhawesh.com.

np Economics XI
Downloaded from: www.bhawesh.com.np
1
Basic Economic Issues: Scarcity, Choice, Allocation of resources,
Production possibility Curve (PPC)
Scarcity:
The scarcity of goods is the basic characteristics of economic world. This
characteristic create economic problem. The economic goods and human resources are
always scarce. Only the natural resources such as: air, water and sunlight are found in
unlimited quantity. The economic goods should be distributed among the people due to
scarcity.
The word scarcity is used in relative sense. All the means are scarce in relation to
human wants. There is scarcity of productive resources such as land, labour, raw
materials, machinery, equipments, etc. in the world. Therefore, it is impossible to produce
all goods and services to satisfy all wants of the people.

Choice:
Resources have alternative uses. For Eg: A plot of land can be used either for
producing paddy or wheat or vegetables or fruits, etc. So, choice is necessary due to
scarcity of resources. All the resources are limited compare to demand. Therefore, the
society must have to choose which commodity is to produce and which commodity is to
sacrifice. Hence, the problem of choice arises.
People have to make choice while spending their income. They have to think how
much to spend and how much to save out of their income. Similarly, it is also necessary
to decide how much to spend on food, how much on dress and how much recreation. In
this way, choice is the basic economic problem.

Allocation of resources:
Resources are scarce and have alternative uses. Therefore, allocation of resources is
the central economic problem. Here, allocation of resources means distribution of
resources in the economy. In a free market economy, the scarce economic resources are
allocated in the following ways:
Determining what will be produced:
The first resource allocation function is to decide what goods and services
will be produced. It is because resources are scarce.

Determining how it will be produced:
The second allocation function is to decide how goods and services will be
produced. It is because there are different ways of producing a product.
Determining whom to produced:
This third function is to decide who will get the goods and services which
are produced. It is because economic resources are scarce.
In a free market economy, allocation of resources is determined by price
mechanism through demand and supply of resources.
Production Possibility Curve(PPC):
The production possibility curve is a tool used to explain the problem of scarcity
and choice. A curve which shows the production possibilities that can be produced with
given resources and technology is called production possibility curve. This curve is also
called production fontire or production transformation curve. According to David Begg:
The production possibility curve shows maximum combination of output that the
economy can produced using all available resources.

Downloaded from: www.bhawesh.com.np Economics XI
Downloaded from: www.bhawesh.com.np
2
Assumptions:
The PPC curve is based on the following assumptions:
I. Only two goods are produced in the economy that is x and y.
II. There is full employment of resources.
III. The supply of factors are fixed.
IV. The time period is short.
V. The production techniques is given and constant.
The concept of production possibility curve is shown in the following table and
diagram.
Combinations Productions of x
(Capital goods)
Production of y
(Consumer goods)
A 0 15
B 1 14
C 2 12
D 3 9
E 4 5
F 5 0
This table shows the production possibilities of x and y goods that can be
produced with given resources. If all available resources are used for the production of y
goods, the economy can produce 15 units of y and 0 units of x. Similarly if all available
resources are used in the production of x goods, the economy can produce 5 units of x
and 0 units of y. These two are extreme points in between these there are various other
possibilities.
In this diagram, AF is the PPC curve. The economy can produced any
combination lying on this curve i.e. A, B, C, D, E & F. The point H lying above the curve
cannot be obtained because of scarcity of resources. Similarly, the point G inside the
curve is inefficient because the resources are unutilized. The economic cannot produce
either inside or outside the PPC curve. Therefore, it is called production possibility
frontire.
Shift in Production Possibility Curve:
I. Upward shift in PPC:
If there is increase in production capacity in the economy the PPC Curve
shifts upward to the right. The increase in the size of working population, increase
in the labour productivity and technology progress shift PPC Curve upward. This
can be shown in the following diagram:
In this diagram, AF is the initial PPC curve. Now, with the increase in labour
force, labour production & introducation of new technology increases the productive
capacity of the economy. As a result, PPC curve shift upward in the form of A1F1.
II. Downward shift in PPC:
If there is decrease in productive capacity in the economy the PPC curve
shift downward to the left. The decrease in the size of working population
decrease in labour productivity and depletion of natural resources shift PPC curve
downward. This can be shown in the following diagram.

In this diagram, AF is the original production possibility curve due to the
decrease in productive capacity of economy because of decrease in labour force,
decrease in labour productivity and depletion of natural resources causes these
curve shift downward in the form of A1F1.