Scarcity, Choice and the Production Possibility Frontier
Scarcity is the basic economic problem: resources (land, labour, capital and enterprise) are finite but human wants are unlimited, so every economy must decide what to produce, how to produce it and for whom.
Before you start
No specific prerequisites - this is a good place to start.
Method
- Define scarcity and distinguish it from a shortage (a temporary excess of demand over supply at the current price); state the three fundamental economic questions every economy must answer: what to produce, how to produce it, and for whom to produce it.
- List the four factors of production - land, labour, capital and enterprise - and the reward each earns: rent, wages, interest and profit.
- Define opportunity cost as the value of the next best alternative forgone when a choice is made, and practise stating it precisely by naming the specific next-best alternative rather than just saying 'what you give up'.
- Draw a PPF with the two goods on the axes; label a point on the curve (productive efficiency, full and efficient use of resources), a point inside the curve (productive inefficiency, e.g. unemployment) and a point beyond the curve (currently unattainable with existing resources and technology).
- Explain why the curve is normally concave: resources are not equally suited to producing both goods, so as more resources are switched into producing one good, increasingly unsuitable resources must be used, and the opportunity cost of each extra unit rises - the law of increasing opportunity cost.
- Distinguish a movement along the PPF (reallocating existing resources between the two goods, which has an opportunity cost) from a shift of the whole PPF (a change in the quantity or quality of resources or in technology, which changes what is attainable - economic growth if outward, negative growth if inward).
- When answering a data-based question, calculate opportunity cost as a ratio between the two changes in output before making any claim about which option is 'cheaper' in opportunity-cost terms.
Worked example
An economy produces only capital goods and consumer goods. At point A on its PPF it produces 40 million capital goods and 100 million consumer goods. It reallocates resources to point B, producing 55 million capital goods and 70 million consumer goods. Calculate the opportunity cost, in consumer goods, of the extra capital goods produced by moving from A to B.
- Identify the change in capital goods produced: 55 million - 40 million = 15 million extra capital goods.
- Identify the change in consumer goods produced: 100 million - 70 million = 30 million fewer consumer goods.
- Opportunity cost is what is given up to get the gain, so divide the consumer goods given up by the capital goods gained: 30 million / 15 million = 2.
- State the answer with units: each extra capital good produced between A and B costs 2 consumer goods given up.
- Note this is a movement along the PPF, not a shift, because total attainable output has not changed, only the mix chosen has.
Practice questions
Try each question, then tap to reveal the answer.
Q1Define scarcity.Show answer
Answer: The economic problem that resources are finite while human wants are unlimited, so choices must be made about how to allocate them.
Q2Name the four factors of production and the reward each earns.Show answer
Answer: Land (rent), labour (wages), capital (interest) and enterprise (profit).
Q3A student can spend Saturday afternoon either revising economics or working a part-time job earning 40 pounds. She chooses to revise. What is the opportunity cost of her decision?Show answer
Answer: The 40 pounds she would have earned from the part-time job, her next best alternative.
Q4On a PPF diagram, what does a point inside the curve indicate?Show answer
Answer: That resources are not being used fully or efficiently, e.g. there is unemployment or idle capacity.
Q5What causes a PPF to shift outward?Show answer
Answer: An increase in the quantity or quality of factors of production, or an improvement in technology, which increases the economy's productive potential.
Q6Why is a PPF usually drawn as a curve rather than a straight line?Show answer
Answer: Because resources are not equally suited to producing both goods, so the opportunity cost of producing more of one good rises as more of it is produced (increasing opportunity cost), giving a concave, bowed-out shape.
Q7A country can produce either 200 units of food or 50 units of machinery with all its resources. Using a straight-line PPF assumption, what is the opportunity cost of one unit of machinery in terms of food?Show answer
Answer: 200 / 50 = 4 units of food per unit of machinery.
Exam-style questions
Written in the style of a A Level Economics exam paper, with a full mark scheme.
Using a production possibility frontier diagram, explain the difference between a movement along the curve and a shift of the curve.
Show mark scheme
Tick each line you got. Your score builds from the marks on the scheme.
Nothing ticked yet - 6 available
Evaluate the extent to which economic growth, shown as an outward shift of a country's production possibility frontier, means all citizens are better off.
Show mark scheme
Tick each line you got. Your score builds from the marks on the scheme.
Nothing ticked yet - 15 available
See real A Level Economics past-paper questions, with official mark schemes →
Free printable worksheet
Want more practice on paper? Download the scarcity, choice and the production possibility frontier worksheet pack - 6 pages of exam-style questions with a full mark scheme. One email opens every download in this browser for 14 days - no account, no card. Print it for personal and classroom use.
Next topics
Not quite what you needed?
Tell us what is missing on scarcity, choice and the production possibility frontier, or which topic to write up next. Every request is read, and we reply to every one.
Build a full practice pack.
This topic is one of hundreds in the library - pick the ones a student needs and generate a printable PDF in minutes.