IJC_H2_ECON_Q1

Innova Junior College Prelim 2 2011 H2 Economics Essay Question 1 a) Explain the relationship between scarcity, choice and opportunity cost. [8] b) Assess the extent to which these concepts are of relevance to the Singapore government when making its policy decisions. [17] a) Explain the relationship between scarcity, choice and opportunity cost. [8] Command Content Context Explain Relationship between Scarcity, Choice and Opportunity Cost No context Scarcity  Choice of “what”, ‘how” and “for whom” to produce. Making a choice  Opportunity cost Tools of economic analysis – Production Possibility Curve Suggested answer scheme Scarcity arises because society’s resources are limited whereas human beings desires are unlimited. In other words, scarcity is defined as the condition whereby human wants and needs exceed production possibilities. This is illustrated by the boundary of the Production Possibility Curve (PPC). The PPC shows the various combinations of goods and services that can be produced within the economy when all resources are fully and efficient ly employed. Referring the Figure 1, given the limited resources of Economy A, the maximum amount of production is within the boundaries of its PPC. Figure 1: Production Possibility Curve of Economy A Because resources are scarce, all societies fa ce the problem of deciding what to produce, how to produce and for whom to produce. Therefore the problem of scarcity of resources implies the need for choice. Society has to decide how best to make use of their limited resources to try to meet the unlimited wants. For example, Economy A has to make a choice between production points X, Y or Z, indicating the choice of “what” and “how much” to produce – i.e. Capital goods vs Consumer goods and the corresponding amounts. Moreover, due to scarcity of resources, an economy also has to decide “for whom to produce”. Producing more consumer goods will imply producing more for consumers rather than for producers. Moreover, society also has to make a choice on “for whom to produce” based on the type of consumer goods to produce. Should more resources be diverted to producing Capital goods Consumer goods Z Y X K2  K1  C2  C1

basic necessities or luxury goods? – the former being produced more for the average household while the latter caters more to the higher-income households. The scarcity of labour resources and capital goods also necessitates the choice of “How to produce” – for example in Singapore where the size of the population is small, existing firms will have to have to make choices regarding whether to make greater use of machinery rather than labour as the main factor of production. Just as scarcity implies the need for choice , making a choice implies the existence of opportunity cost. Opportunity cost can be defin ed as the next best alternative forgone. For example, point Y on the PPC (Figure 1) shows C 1 c