Dr Robin Nunkoo

Associate Professor
University of Mauritius
r.nunkoo@uom.ac.mu
THE SOURCE OF ECONOMIC
PROBLEM:
SCARCITY AND CHOICE
 ‘Economics is the study of how society
decides what, how and for whom to produce.’
(Begg & Fisher)

 Human behaviour in the production,

exchange and use of goods and services
Economic problem arise because:
 The production that can be obtained by
fully utilizing all of a nation’s resources is
insufficient to satisfy all the wants of the
nation’s inhabitants

 Because resources are scarce it is necessary

to choose among the alternative uses to
which they could be put
 The central economic problem is how to
reconcile the conflict between people wants
and desires and the limited resources

 Economics explains how scarce resources are

allocated between competing claims on their
use
Resources – 4 types
 Natural resources: Free gifts of nature such
as land and fores
 Labour: Human resources, mental or
physical
 Capital: Man made aids to further
production such as tools, machinery and
factories
 Entrepreneurship: One who undertakes
tasks
=
FACTORS OF PRODUCTION
 Supplies of resources are sufficient to
produce only a fraction of the goods and
services that people desire

 Wants are unlimited while resources and

limited

 Gives rise to the basic problem of scarcity

 Choices are necessary because resources of
scarce

 Having more of one good means having less

of another good

 Opportunity cost
 The opportunity cost of a good is the quantity
of other goods which must be sacrificed to
obtain another unit of that good

 Emphasize the need for choice

 Choice and opportunity cost can be better
illustrated by the PPC
 The PPC shows, for each level of the output of
one good, the maximum amount of the other
good that can be produced
 Shows the maximum combinations of output
that an economy can produce using all
available resources
 Quantity of film output is measured on the X
axis
 Quantity of food output is measured on the Y
axis
 Any point of the diagram indicates some
amount of each good produced
 PPC separates the attainable combinations
such as A, B and C from unattainable
combination such as D
 Negatively sloped because in a fully
employed economy more of one good can
be produced only if resources
 Point A and B represent efficient use of
society’s resources
 Point C represents inefficient use of
resources or a failure to use all resources
that are available
PPC illustrates:
 scarcity: unattainable combinations beyond
the boundary
 Choice: the need to choose among the
attainable points on the boundary
 Opportunity cost: the negative slope of the
boundary which shows that obtaining more
of one type of output requires having less
of the other
 There are 5 workers in an economy. Each
worker can produce either 4 cakes or 3
shirts.
(i) Draw the economy’s PPC
(ii) How many cakes could society produce if
it was willing to do without shirts?
(iii) Indicate the points in your diagram that
show inefficient organization of
production
(iv) Indicate those points on your diagram
which are unattainable and explain why