There are a few things in the world that are considered to be present in such abundance that they are in effect free to all. The classic examples usually given are seawater and air. All other needs and wants are subject to scarcity. There being a limited supply of the good (or service) to satisfy the wants and needs of everyone. Throughout this short write-up I shall use the term ‘good’ or ‘goods’ with the understanding that the word also includes services. There being little difference in the two anyway other than our common usage of the term service for a good that is comprised of someone’s time and skills. This concept that most goods are finite in availability but are often desired infinitely is the heart of economics.

The availability of these resources limit the production of any good and the allocation of each towards production of specific goods determines in part the relative scarcity of different goods. The resulting amounts of different goods as a result of specific allocations of the factors of production is referred to as the Production Possibilies Frontier .

Land used for grazing cattle removes that land from the quantity available for production of grains, fruits and vegetables. Thus the balance of land used towards each requires a trade off or opportunity cost of not producing the other good. Opportunity cost is another central concept of economics. Use of resources towards one purpose normally precludes their use towards another. A simple example should suffice to help understand.

If you have $20 then you could take a date to the movies or to a modest dinner but not to both (at least not where I live). You will make your decision as to which way to spend your money based on the value you perceive each to offer you and your companion. This is a trade off you must make because your resources (money) are not sufficient to purchase all the goods you would like to have. This is an example of scarcity at the micro scale. At the macro level you might consider the trade offs that a society makes in providing health care to it’s population. Since resources are limited, there is a trade off that to provide health care services removes those factors from other areas of production. Within the area of health care further trade offs occur. Researchers and their facilities searching for effective vaccines to the current flu variation are removed from searching for treatments to cancer.

So, to review; the factors of production are limited and thus only a limited supply of any good may be produced or purchased. The allocation of the production resources available will determine the mix of goods that are produced.

The Production Possibilities Frontier is the graph showing the relationship between production rates of two goods that could be produced by an entity. The curve is drawn along the efficient production possibilities. Any point inside the curve indicates less than full utilization of production factors while any point outside represents a case that cannot be achieved with the existing level of production resources.

Consider this example. At points A & B we represent two possible situations of producing a combination of cigars and scotch. Point D represents a production combination that cannot be achieved with current resources and C shows under utilization of resources resulting in producing less than could be achieved.

The primary purpose of such a curve is to show how choosing to produce more of one of the products forces a tradeoff of producing less of the other. Another way to look at it is that to increase one product ‘costs’ the amount of the other product that can no longer be produced. This cost is referred to as opportunity cost.