Scarcity, PPF, and Supply & Demand in Economics

Introduction to Economic Decision-Making

A country's economy is driven by its internal economic decisions, as well as the factors that shape those decisions. Poor economic decisions will weaken a country's economy, while wise decisions will strengthen it. The wisdom of such decisions depends on many variable factors that differ not only from country to country, but also across different periods of time — ranging from months to years, or even decades and centuries. In effect, a wise economic decision made today in the United States would not have been equally wise fifty years ago in Europe. Specific economic factors that affect the dynamics of an economy include scarcity, the production possibility frontier, and supply and demand.

All economic concepts can be viewed at either the individual or the collective scale. In terms of the impact of economics on the broader economy, these concepts are generally considered from the collective viewpoint. Scarcity, for example, is the tension between the limitation of what is available and the unlimited nature of human wants and needs. Just as an individual's resources are limited in terms of time, money, and skill, a country's resources are limited in terms of natural resources, capital, labor, and technology. Economic decisions therefore involve determining which wants and needs will be best fulfilled by the limited availability of resources.

Scarcity and Resource Allocation

These decisions are often based on a country's collective values, as well as how those values relate to the particular scarcities within that country. A highly efficient allocation of resources leads to a relative level of prosperity, while poor decisions in this regard are detrimental to a country's economy. This explains why, although some developing countries are very rich in natural resources, poor allocation of those resources and a lack of investment result in a weak economy and consequent poverty for individuals living there.

The economies of countries also interact on a worldwide scale through the exchange rate. This, in turn, contributes to the prosperity level within a country — a favorable exchange rate allows import and export activity to maintain a healthy balance. A country with a poor exchange rate, on the other hand, may find it either impossible to export goods or too expensive to import them, even when those imports are necessary. This creates an excess of scarcity, and the balance between wants, needs, and the ability to fulfill them becomes strained.

The Production Possibility Frontier

Another way of framing this problem is through the production possibility frontier (PPF). The PPF refers to the efficiency with which an economy operates. When an economy produces its goods and services at optimal efficiency, the PPF is reached at an adequate level. It is, however, also true that the ideal level of PPF is notoriously difficult to reach because of the many variables within an economy. It is therefore necessary to construct clear PPF charts that indicate the economic areas in need of improvement, for the purpose of building a more efficient economy.

The PPF thus provides economists with an indication of the decisions necessary to help a country's economy grow. These decisions necessarily entail that some potentially productive opportunities are sacrificed in order to pursue what is estimated to be the most productive choice.

Conclusion

Disequilibrium is far more common, with either excess supply or excess demand signaling a need for adjustment. Excess supply indicates that the price is set too high above the equilibrium point and should be lowered, while excess demand indicates that an insufficient quantity of goods is being produced, which should be increased to approach the equilibrium amount. Understanding these dynamics is central to making sound economic policy decisions.

The economic ideal in the supply and demand relationship is equilibrium. In order to continually optimize the allocation of resources and improve the economy, economic decisions must be oriented toward achieving that equilibrium. A country's values and economic goals should reflect this objective. Many factors can contribute to the overall status of an economy, and being well-informed about efficient economic principles and the allocation of resources is a valuable first step toward sustained prosperity.