If has been observed that in reality, scarcity leads to the problem of choice and once we choose we must go without others.
Satisfaction of one’s must involve foregoing something else. Therefore the opportunity cost of real cost of satisfying any wants is the alternative that has to be foregone in order to do so.
That is the real cost of satisfying anything in the alternative that has to be forgone. In simple language opportunity cost is the sacrificed alternative in deciding to do one thing and not the other.
- Human wants are unlimited while the means to satisfy them are limited. Therefore one has to choose what want to satisfy because one cannot satisfy all wants due to scarcity of resources.
Usually one satisfies the most pressing wants before satisfying the less pressing wants.
The sacrificed goods are thus the real cost or opportunity cost of satisfying the wants that are sacrificed.
E.g. If you had to choose between leisure and work, sacrificing leisure then the real cost or opportunity cost is very useful in the process of planning especially in the question of resources allocation. When we choose to allocate more resources to production of consumer goods we are necessarily forced to the reduce the allocation of resources to the production of producer/ investment goods.
PRODUCTION POSSIBILITY FRONTIER OR CURVE (PPF OR PPC)
A production possibility curve is a curve representing all possible combinations of total output that could be produced by the economy when its resources were fully and efficiently utilized under a given state of technology.
The production possibility curve is also known to other economist as production possibility frontier or Boundary.
The concept of production possibility curve helps to explain the concept of scarcity and opportunity cost.
The following are the assumptions of the production possibility curve;
- The resources are fully and efficiently utilized.
- There is a constant state of technology.
- Only two commodities are being produced.
- The amount of resources is fixed.
Given that the resources and technology are fixed, we can produce more of every commodity from the resources which can be used to produce more of another commodity.
In the production possibility curve, since the resources are scarce, we are forced to choose between production of capital goods and consumer goods. Sacrificing the production of consumer goods. Thus the opportunity cost of more capital goods is the consumer goods that we have to sacrifice.
From the graph, we learn that the shape of the production possibility curve is concave to the origin. Because there must be the decrease in output of guns in order to add more unit of butter e.g. To produce one unit of butter we have to foregot one unit of gun i.e from A to B.
This is called the marginal rate of technique substitution of butter for gun and it goes on increasing.
If the economy devoted all its resources to the production of gun it can produce 15 thousand guns but the production of butter will be zero.
Therefore if we decide to produce 1unit of butter we have to produce 14 units of guns.
From the graph therefore we learn that if butter we want to produce more butter we have to reduce the output of guns and vice verse i.e. we can transform guns into butter or butter into guns.
The point on the boundary of PPC i.e. A, B, C, D, E and F represents the combination of goods that can be produced using the country’s available resources and technology.
Any point inside the boundary say K is one from the diagram it shows inefficiency of which may be under utilization or unemployment of the countries resources.
From point A to point F, it indicates the increase in the production capacity of the economy. The new graph tells us that economy can now produce large quantity of output.
Point H on the graph indicates unattained point of which it is outside the PPC .point K will be attained when the economy increases its production leading to the shift of the PPC from its original position to point K.
- How choice, opportunity cost and scarcity are shown on the PPC.
Choice is indicated by selecting any point on the PPF. When resources are fully utilized i.e. a,b, c,d,e and f.
Opportunity cost is indicated by movement along the PPF i.e. a, b, c, d, e and f. e.g. The opportunity cost of producing 15 units of guns is the 0 unit of butter that you forego at full employment of the resources.
Scarcity is indicated by point H which has not been attained. It will depend on the expansion of the production in the economy.
In order to move the economy from the current production possibility curve to the outer production possibility curve, the economy has to;-
- Increase in the stock of its resources.i.e. To increase the quality of labor, land, capital and entrepreneurship.
- Improve the state of the technology to more advanced methods in order to find move output of maximum cost of production of capital.