Economic Growth and Scarcity

Only available on StudyMode
  • Download(s) : 1039
  • Published : October 19, 2012
Open Document
Text Preview
Discuss whether economic growth solves the problems of scarcity.

Scarcity is the situation where finite factor inputs are insufficient to produce goods and services to satisfy infinite human wants. Economic growth is defined as the increase in real Gross Domestic Product(GDP) through time. Growth occurs if there is an increase in land, labor, human capital and technology. The question on whether economic growth solves the problem of scarcity can be discussed using the production possibility curve(PPC).

The production possibility curve reflects scarcity. Suppose we assume that there are only two goods beings produced in a country: Good X and Good Y. The PPC shows all the different combinations of the two goods that can be produced in the economy when factor inputs are fully and efficiently employed, given the state of the technology.

Good Y
Good X
d
PPC1

In the above diagram, the PPC is concave to the origin because factor inputs are not equally suitable for producing different goods. As the economy produces more of Good Y, it has to use factor inputs that are less and less suitable for producing Good Y to actually produce Good Y. This means that increasingly more units of factor inputs must be used to produce each additional unit of Good Y. Therefore, increasingly, more units of Good X must be given up to produce each additional unit of Good Y. In other words, the opportunity cost of producing Good X increases as its quantity increases. Scarcity is reflected by point d, which is the country’s demand for goods; Current resources allow production only up to any point on PPC1, which makes point d currently unattainable.

If the economy is producing on the production possibility curve, scarcity can be solved with economic growth. Economic growth can be attributed due to increasing the quantities or qualities of the resources For instance, education and training will increase human capital and hence the productivity of the labor force. Research and...
tracking img