Scarcity and Economic Choices

• People in society need various goods and services like food, clothing, shelter, transport, and education.
• No individual has all the goods and services they need, possessing only a few.
• A family farm may have land, grains, implements, and family labor.
• A weaver may have yarn, cotton, and weaving instruments.
• Each decision-making unit produces goods/services with its resources and trades a portion to get other necessities.
• A family farm produces corn, using some for consumption and trading the rest for clothing, housing, and services.
• The weaver exchanges cloth for desired goods and services.
• Laborers use earned money to fulfill needs.
• Resources are limited compared to needs.
• A family farm's corn production is limited by its resources, impacting the variety of obtainable goods.
• Scarcity forces choices between available goods/services.
• More of one good/service means less of another.
• A bigger house may mean less arable land; better education may mean less luxuries.
• Everyone faces resource scarcity, necessitating optimal use of limited resources.
• Individuals produce goods/services but desire a combination that extends beyond their production.
• Compatibility is needed between societal wants and collective production.
• Total corn production should match societal consumption needs.
• Excess corn production means resources could be used for other in-demand goods/services.
• Insufficient corn production means resource reallocation to corn production.
• Societal resources are scarce, and proper allocation is needed based on the preferences of the people.
• Resource allocation results in a combination of goods/services to be distributed among individuals.
• Allocation of limited resources and distribution of the final goods/services are basic economic problems.

Central Problems of an Economy

• Production, exchange, and consumption are basic economic activities.
• Scarcity of resources leads to the problem of choice.
• Scarce resources have multiple uses.
• Societies must decide how to utilize scarce resources.
• Economic problems are often summarized by the following questions:
• What is produced and in what quantities?
  • Societies must decide how much of each good/service to produce
  • For example, whether to prioritize food, housing, luxury goods, agricultural goods, industrial products, education, health, or military services.
• How are these goods produced?
  • Societies must decide on the resources to use in production.
  • For example, labor vs. machines and which technologies to adopt.
• For whom are these goods produced?
  • Deals with the distribution of products in the economy.
  • Example is who gets more or less, and if a minimum consumption is ensured.
• Economies must allocate scarce resources for production and distribute produced goods/services.
• Resource allocation and final goods/services distribution are central economic problems.

Production Possibility Frontier

• An economy's resources are limited versus the collective wants of its people.
• Scarce resources have alternative usages.
• Every society determines how to allocate resources for different goods/services.
• The society has to determine how to allocate its scarce resources to different goods and services
• Resource allocation leads to a specific combination of goods/services.
• Given total resources, the resources can be allocated in different ways, achieving different mixes of goods/services.
• The production possibility set is the set of all possible combinations of goods/services that can be produced from a given amount of resources and a given stock of technological knowledge
• With corn or cotton resources, the maximum amount of corn produced is 4 units and the maximum cotton is 10 units when resources are fully utilized
• Possibilities include 1 unit of corn and 9 units of cotton or 2 units of corn and 7 units of cotton or 3 units of corn and 4 units of cotton.
• A production possibility frontier illustrates the economy's production possibilities, and represents the combination of various outputs with the resources
• The production possibility frontier provides combinations of corn and cotton when resources are utilized.
• A point lying below the frontier shows production with underemployed or wastefully used resources.
• More of one good always means less of another.
• The opportunity cost is the amount of the other good that has to be forgone in terms of an additional unit of the goods
• Every economy chooses one of the many possibilities it has which is a a central problems of the economy