Scarcity, Choice, Opportunity Cost and the Production Possibilities Curve

Scarcity means that the resources available to an economy (land, labour, capital, entrepreneurship, and time) are limited relative to the unlimited wants they must satisfy. Scarcity is what makes choice unavoidable — because everything cannot be produced or consumed at once, a decision-maker (an individual, a firm, or an entire economy) must select which wants to satisfy first and which to leave unsatisfied, for now.

Opportunity cost is the value of the next-best alternative that is given up when a choice is made. It is also called the "real cost" of a decision, because it measures cost not in money but in terms of the best foregone alternative. If a farmer's field can grow either cotton or sugarcane, and the farmer chooses to plant sugarcane, the opportunity cost of that choice is the cotton crop that could have been grown instead on the same land. Similarly, if a state government spends its budget on building a new highway rather than a new hospital, the opportunity cost of the highway is the hospital that was given up. Opportunity cost applies to individuals (choosing between studying and a part-time job), firms (choosing which product line to expand) and governments alike, and is one of the most widely used ideas in the whole of Economics.

The Production Possibilities Curve (PPC), also called the Production Possibility Frontier, is a simple diagram used to illustrate scarcity, choice and opportunity cost together. It shows the maximum possible combinations of two goods (say, food grains and cotton) that an economy can produce in a given period, using all its available resources fully and with a given level of technology.

<!-- FIGURE-NEEDED: A standard concave-to-the-origin Production Possibilities Curve with two axes — Food Grains (Y-axis) and Cotton (Z-axis) — showing: (1) the curve itself running from a point on the Y-axis to a point on the X-axis (bowed outward from the origin); (2) a point A on the curve (a fully-efficient, attainable combination); (3) a point B inside the curve, labelled as an inefficient/underutilised combination (unemployed or idle resources); (4) a point C outside the curve, labelled as unattainable with current resources/technology; and (5) an outward-shifted dashed curve illustrating economic growth (more resources or better technology). No numeric axis values are required — a schematic, correctly-shaped illustrative curve with these four labelled points is sufficient. -->

Three important lessons follow directly from the PPC:

• Any point on the curve itself (such as point A) represents full and efficient use of resources — to produce more of one good from such a point, the economy must give up some of the other good; the amount given up is the opportunity cost, and it is read directly off the curve's own slope.
• Any point inside the curve represents unemployed or inefficiently used resources — the economy could produce more of both goods simply by using its existing resources fully, without any trade-off. …