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CHAPTER 2
THE ECONOMIC PROBLEM:
SCARCITY AND CHOICE
2.1 The Production Possibilities Frontier (PPF)
2.1.1 Constant Opportunity Cost
2.1.2 Increasing Opportunity Cost
2.1.3 Economic Concepts of PPF
2.1.4 Shift of PPF
2.2 Basic Questions of Economics: What, How and Whom
2.3 Economic Systems: Capitalists, Socialists and Mix

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Introduction
 This chapter will focus on the economic problem deal with
scarcity and choice.
 First we will look into the basic question of economics.
 Second, discussion about the production possibilities
frontier; definition, the type and economic concept.
 Finally, we briefly explain about the economic system; pure
capitalism, command economy and mix economy.

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Basic Questions of Economics

Figure 2.1 Basic Question of Economics

What gets How is it produced - deal Who get what is

produced - deal with production produced - deal
with resources processes with customers

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The Production Possibilities Frontier (PPF)

 Production possibilities Frontier (PPF) represents

the possible combinations of two goods and
services that can be produced of a given
technology and used efficiently of resources in
certain period.
 There are two type or categories of production
possibilities Frontier; constant and increasing
opportunity cost.

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The Production Possibilities Frontier (PPF) :Constant
Opportunity Cost
Table 2.1 PPF Constant
Opportunity Cost Bread

A
Combination Bread Cake Point in 6
PPF B
5

C
A 6 0 A
4
B 5 1 B D

C 4 2 C 3
E

2
D 3 3 D
F
1
E 2 4 E
G
F 1 5 F

G 0 6 G
0 1 2 3 4 5 6 Cake

Figure 2.2 PPF Constant

Opportunity Cost

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The Production Possibilities Frontier (PPF):Increasing
Opportunity Cost
Table 2.2 PPF Increasing
Opportunity Cost

Pineappple
(tonnes)
A

Combination Pineapple Banana Point 210 B

200
(tonnes) (tonnes) in PPF C
180
A 210 50 A
D

B 200 60 A 140

C 180 70 B

D 140 80 C 0 50 60 70 80 Banana (tonnes)

Figure 2.3 PPF Increasing

Opportunity Cost

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The Production Possibilities Frontier (PPF)

 The curve is downward sloping or the slope is negative -

known as the marginal rate of transformation.
 The value of slope is the change between two point along
production possibilities frontier (change in Y axis divide by
change in X axis).
 Constant opportunity cost: the production possibility
frontier (PPF) which is straight line.
 Increasing opportunity cost: the production possibility
frontier (PPF) which is bowed outward (concave
downward) line.

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The Production Possibilities Frontier (PPF)
 The concave of PPF reflect to law of increasing opportunity
costs.
 The law of increasing opportunity costs define as the more
of a good which is produced, the greater is its opportunity
costs.

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Economic Concept of PPF

Economic
Concepts

Opportunity Efficiency, Productive Economic

Scarcity Choice Unemployment
cost productive inefficiency growth

Figure 2.4 Economic concept of PPF

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Economic Concept of PPF
Handphone
(Thousands)
A

40 B
35
C

28

D
18 *E

Television
0 20 30 40 50 (Thousands)

Figure 2.5 PPF and Economic Concept

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Economic Concept of PPF
 Scarcity of resources is represented by the frontier itself or
along the line. Thus due to scarcity, economy can produce
the product only along the frontier.
 Point F, means that economy cannot achieve (unattainable
region) due to limited of resources.
 Point E (attainable region) the economy can produce the
output but there are some extra resources. This point also
can reflect to unemployed of resources.

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Economic Concept of PPF
 Choice is illustrated by combinations of the two goods
produced. In Figure 6, there are four combination of goods
that attainable.
 Opportunity cost is represented as we change the
combination of goods that chosen. For example, if we move
from combination A to combination B, it means that to add
10 thousands television, we have to let go or sacrifice about
5 thousands handphones.

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Economic Concept of PPF
 Productive efficiency is define as economy produce
maximum product with resources and technology given.
Productive efficiency represented by the points on the PPF
(such as A,B, C and D.
 Productive inefficiency occur when economy produce less
maximum product with resources and technology given. It
is represented by any point below or inside the PPF such as
point E).

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Economic Concept of PPF
 Unemployed resources occur at any productive inefficient
point (such as E ) due to economy not use all the resources
available. While, a point along PPF (point A, B, C and D)
means no resources are unemployed.
 Economic growth is characterized by an increase in total
output in economy. It occur due to increase in resource or
new resources and advance technology.

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Economic Concept of PPF
Handphone
(Thousands)
80
PPF3 • If technology advance
70 only in production of
56
handphone, the PPF of
handphone will rotate to
the right; PPF3. While, If
40

PPF
PPF1
technology advance only
in production of
television, the PPF for
PPF2

0 20 30 40 50 60 70 80 90
television will rotate to
Television
(Thousands) the right; PPF2.
• However, the economic
Figure 2.6 Shift of PPF and downturn, PPF will shift
Economic Concept to the left or backward.

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Economic Concept of PPF

Good for Good for

the future the future

Future curve
Future
curve

Current
Current curve
curve

Good for the present

Good for the present
Poor country Rich country

Figure 2.7 Shift of PPF: Poor and Rich Country

Figure 2.7 show the economic growth between poor and rich country. The
poor country has fewer goods for future compare to rich country. Thus the
economic growth in rich country is higher than poor country.
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Economic Systems
 Economic systems is a particular set of
institutional arrangement and a coordinating
mechanism to respond to economic problem.
 Economic system can be distinguished by who
own the inputs or factors of production and the
method used to coordinate and direct economic
activity.

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Economic Systems
 Pure capitalism or laissez-faire is the private
ownership of resources and the use of a systems
and prices to coordinate and direct economic
activity without government intervention in
economy.
 The behaviour of buyer and sellers in this type of
economy determines what get produces, how it is
produced and who get it.

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Economic Systems
 Command or communism economy (planned economy) in
which the government controls the economy. All major
decision such as the level of resources use, the composition
and distribution of output and the organization of
production determined by central planning appointed by
government.
 A mixed economic system combines elements of the
market and command economy. In this economy private
and government are work together.

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THESE TEACHING MATERIALS ARE TAKEN FROM THE
PRINCIPLES OF ECONOMICS WRITTEN BY ANIZAH MD ALI
AND PUBLISHED BY UUM PRESS 2021. ISBN 978-967 2486-
65-7

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