The concepts of scarcity, choice and opportunity cost can be explained with reference to the production possibility curve. Resources to produce goods and services are never enough (scarcity) hence the need to make a choice on what to produce and what not to produce (choice). Making a choice results in opportunity cost of the benefit forgone by not selecting the alternative courses of action. This assertion clearly demonstrates the complexity and difficulty management face in making decisions as resources are always scarce and there is need to satisfy unlimited human needs.
Scarcity is the situation where resources are insufficient to produce goods and services to satisfy unlimited human wants. Due to scarcity, an economy or society chooses what goods and services to produce and not produce. The availability of limited resources to meet unlimited nature of human wants that the resources are meant to satisfy best describes the concept of scarcity. According to Richard G. Lipsey (1976), because there are not enough resources to produce everything we would like to consume, there must exist some mechanism by which it is decided what will be done and what will be left undone, what goods will be produced and what left unproduced, and whose wants will be satisfied and whose left unsatisfied. The assertion by Lipsey clearly shows that a choice has to be made among alternative courses of action or production choices. Choices are made basing on rational behaviour by economic agents to maximise their desired goals such as profit or maximisation of utility for firms and individuals respectively. Given limited scope for choice as a result of constraints on resources, the decision to select a certain course of action means that we have to forego other courses of action and their associated benefits (opportunity cost). This is in agreement to Samuelson- Nordhaus (2010) who defined opportunity cost as the second best alternative foregone when making the best choice. This is further expounded by Mabry Ulbrich (1994) assertion that the cost of choosing to utilise a resource for one purpose is measured by the sacrifice of the next best alternative using the resource.
The Production Possibility Curve (PPC) reflects scarcity, choice and opportunity cost as closely related and interrelated concepts. The PPC shows all the different product combinations of the goods that can be produced in an economy when available factors of production are optimally and efficiently employed, given the state technological advancement in the country. There is therefore need to strike a balance between the different product combinations in accordance with the organisational goal at the same time ensuring that the maximum potential of the scarce factors of production is realised.
• D (unattainable)
0 X1 X2 B
Good X (Tonnes)
The diagram above shows the Production Possibility Boundary or Curve. The curve or frontier shows how organisations or economies decide on what goods or services to produce, their quantities and the target beneficiary. This choice is key in sustaining economies and has to be made after thorough considerations. The organisations or economies must be prepared to meet the cost of not producing the forgone product. As depicted on the model, a comparison is made between two goods at a time where decisions to produce should be taken thus clearly depicting the correlated concepts of scarcity, choice and opportunity cost. The three are key economic concepts that require clear understanding and balancing by management or economies as they are extremely influential in making decisions in any productive economy. This is so because as an economy or an organisation produces more of a certain product, the inherent costs also increase due to additional resources needed to produce the additional product. For example, suppose it costs Delta Beverages fifteen dollars to produce a crate of coca cola soft drinks, the decision by the company to produce an additional crate to double the number of crates means that it has to pay another fifteen dollars more and the trend continues with increase in production. The additional cost has an effect on the other competing product on the production line. The process goes on continuously with the costs of production increasing as the number of crates increases.
As shown on the diagram above, the production possibility frontier or boundary is normally drawn as bulging outwards if one views from the point of origin. However, the frontier or curve can be represented as bulging downward or linear depending on a quantity of assumptions being considered. The curve thus illustrates a number of concepts of economics, such as limit or scarcity of resources required which is a key economic challenge faced by societies, organisations or economies in all parts of the world are grappling with. It therefore calls for efficiency in production to achieve the best use of resources available. The curve as shown on the above diagram represents the optimum level of production for the two goods X and Y. The curve A to B on the diagram represents the optimum level of production for an organisation or economy. Therefore any production along the curve is regarded as efficient while production outside the curve is viewed as desirable but unattainable or inefficient depending on the direction of movement. Countries thus strive to balance usage of the factors of production by producing along the boundary or frontier. Efficient production means that the economy or organisation is producing at the optimum level where there is efficient utilisation of available resources. In other words, the economy is producing most with the least possible amount of resources. This implies that since resources are always scarce, the ideal is to produce at points along the curve where there is best utilisation of the scarce resources.
Choice of production to be made by an organisation or economy is illustrated by the decision a country makes between available