The concept of scarcity and opportunity cost can be explained with reference to the production possibility curve. Scarcity is a situation in which wants and needs are in excess of the resource available. In other words, there are not enough resources to produce everything people want in the economy. Therefore, it is important to make choices regarding what goods and services need to be produced. Making choices means that we need to give up something, which then leads to opportunity cost — expressed in terms of the next best alternative that is forgone. A production possibility curve(ppc) demonstrates the combination of products which can be produced with the present level of resources.
From the diagram above, the ppc shows the combinations of all good A and B that can be produced when all resources are fully and efficiently employed. There are 4 combinations on the curve, A, B, C and D. A is within the ppc, B and C are on the ppc and D is outside ppc. Evidently, point D the best choice for the economy as it has the highest number of good A and B. However, it is actually an unattainable point with the present level of resources. This clearly reflects scarcity, where the want of the economy cannot be satisfied because there are not enough resources. It can only be achieved by increase the quantity or quality of the resources. For example, if there is a technological advance breakthrough create more raw resources for A and B, ppc will shift outwards and could achieve point D and reduces the problem of scarcity.
It is obvious that the ppc is concave to the origin, which is because the opportunity cost of producing each good increases as its quantity increases. It can tell from the diagram that the opportunity cost of producing a more unit of good A at first is small. But it increases as more and more good A is produced. This is because resources are not all suitable for the production of different goods. Therefore, to produce each additional unit of good A will require giving up increasingly more units of good B. For example, if good A is vegetables and good B is computers, at point B all farmers can use fertile land. However, as all fertile lands are occupied, other farmers(could be teachers, students and other labour)are going to use concrete land in cities to grow vegetables. Apparently, the yield will be lower and lower, thus, ppc is concave and shows an increasing opportunity cost.
In conclusion, we can relate the concept of scarcity and opportunity cost to the ppc.
