Answer to Question #127033 in Microeconomics for James Saitoti

Question

Economy zee produces only two goods milk and bananas : bananas on (x-axis)

Explain scarcity, choice and opportunity cost with regard economy zee.

Answer 1

Scarcity

Scarcity, in general, refers to a shortage that exists when economic resources are not sufficient to satisfy human needs and wants. With regards to Zee economy, resources such as liquid and physical capital, land, and time are required to produce both milk and bananas. However, it is difficult for the economy to have enough of such resources to produce enough output of both milk and bananas, given the insatiable nature of human needs and wants.

Land, capital, time resources are finite whereas human needs and wants are unlimited. As a result, these resources are said to be in scarce supply and hence scarcity. When the information is presented on a production possibility curve (PPC) with bananas drawn on the x-axis and milk on the y-axis, feasible output combinations of milk and bananas will be restricted to the PPC. Combinations of outputs outside the PPC are highly desirable but not attainable given the available resources; this demonstrates scarcity.

Choice

Choice is defined as a comparison of alternatives in order to select the best. Choice arise because scarcity restricts economic agents from getting everything they need to satisfy their needs and wants.

With regards to Zee economy, the scarcity of resources to produce enough of both bananas and milk to satisfy human needs and wants results in the economy choosing between which of the two goods to produce more; it is impossible to produce enough of both goods.

Economic decisions are made at the margin; people compare marginal benefit and marginal cost. Thus, an assessment of the marginal benefit and marginal cost of milk and bananas is done; resources are then channeled towards the production of the good with the highest net marginal benefit. This is the concept of choice.

As an example, milk is a fundamental component of people's diet. Milk is also used as an essential ingredient in the production of food such as tea, bread, and dairy products such as ice creams, drinks, and yoghurts. This could mean that milk has a high marginal benefit as compared to bananas. As a result, because resources are scarce - they do not permit the maximum production of both milk and bananas, more of them will be channeled towards milk production. This implies that a choice is made in favour of milk.

On the PPC, a choice is shown by a movement up or down the curve; choosing between more of one good and less of the other.

Opportunity Cost

Opportunity cost is defined as the benefit foregone of the next best alternative when a choice is made. With regards to the economy of Zee, it implies that choosing to produce more of milk results in the foregone benefits that would have been realised had more bananas (the next best alternative) been produced. By producing more milk, the health benefits of bananas such as vitamins and their value in the production of products such as yoghurts, is foregone. Likewise, would be the foregone benefits if a choice is made towards production of more bananas than milk.

On the PPC, it is shown by the fact that it is difficult to increase the output of one good, milk or bananas, without producing less of the other.

Technically, scarcity leads to choice, and choice leads to opportunity cost. Specialisation and trade are brought by opportunity cost (the comparative cost advantage theory)