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Production Possibility Curve And Circular Flow Of Economic Activity

 Choice As Economic Problem, Production Possibility Curve And Circular Flow of Economic Activity
Scarcity and Choice As Economic Problems

Human needs are becoming higher day by day and the means to satisfaction are lower than expected and every society faces two quandaries of scarcity and choice.

The Problem of Scarcity and Choice

Populace' wants and needs on variety of goods and services are doubling at present. This equally applies to both rich and poor people. At one point, only some degree of goods and services can be produced since existing supplies of resources are intensely scarce. The resources land, labour, capital and entrepreneur are the factors of production which are used in producing goods and services that are called economic goods which have a price value. Scarcity of resources is the key problem of every society and advocate the Law of Scarcity.

Since scarcity of resources is the key problem, the produce is meagre than expected and hence gives rise to an elemental economic problem of Choice. As a society cannot produce goods in expected quantities, people have to make choices. When a choice is made, it involves sacrifice such as economy or quality wise. For example, a government decides to build hospitals and due to which building schools lacks resources. Hence it has to forego either one for time being. The act of foregoing either one is called opportunity cost.

Innermost Problems of Fiscal

In the event of scarce resources, the act of foregoing enters and a society has to face choices such as:
  • Amount of Goods and Services and their qualities

  • Way of producing goods and services

  • To produce for which particular category of people

  • Efficient utilization of resources

  • Monitoring of fiscal growth by producing
Now after seeing the problems of Scarcity and Choice we can construct a production possibility curve in order to ascertain production growth towards the economic growth.

Production Possibility Curve

Production Possibility Curve is used to describe the problem of Choice. It has the following assumptions:
  • Two goods A and B are produced in different magnitude in the economy, where A is the consumer goods and B is the Capital goods.

  • The factors of production can be utilised for both the type of goods and reallocated liberally among them subject to the supply of resources being fixed.

  • The techniques of production are provided and are invariable.

  • The resources are fully utilised and are technically efficient and the time period is minimum.
The tablet below is structured based on the assumptions

Possibilities

Amount of A

Amount of B

F1

1000

0

X

750

250

Y

500

500

Z

250

750

F

0

1000



Here, F1 and F are optional productions, where the financial system can make either 1000 units of A or 1000 units of B. With the given resources, the economy should produce both the types as per the above assumptions. And X, Y and Z are the options in producing two goods. That is, when A produces 750 units, B can only produce 250 units and vice versa. Hence either of one or both has to sacrifice to some extent of production with the given resources with the above choices X, Y and Z.

Now let us see how the curve is modelled with the given postulates.

The rate of transformation of one product into the other when the economy moves from one Option point to the other option point, the rate of transformation on a production curve increases as we move from Point X to Y and to Z. All optional combinations such as X, Y and Z lying on the production possibility curve show the combinations of two products that can be produced by the existing resources and technology of the society. Such combinations are called 'Technologically Efficient'. Any combination lying inside the production possibility curve such as TI denotes that the society has under utilised the resources, which is termed as 'Technologically Inefficient'. Any combination lying outside the production curve, such as TU denotes the economy does not possess sufficient resources of producing this combination of work and it is termed as 'Technologically Unobtainable'.

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