Discuss whether economic growth solves the problem of scarcity. [12 marks]

Chapter: Central Economic Problems

Examine whether economic growth can affect the production possibility curve. Application of the concept of opportunity cost is required to answer this essay question.

   07 August 2018

economics tuition notes definition

Economic growth refers to the growth of the resource and production capacity which is measured in actual or potential capacity. Actual economic growth refers to the actualization or utilization of resources into products, contributing to the growth of production capacity. This means that the level of national income has increased and this is represented by the movement of the production level within the PPC to the production level on the PPC. As for potential growth, it refers to the expansion of the availability of the resources, implying that there are more resources for production in the economy. This means that the potential production capacity has expanded and this is represented by the outward shift of the PPC.

The problem of scarcity is said to be resolved when the growth of the production and resource capacity eradicate the condition of inadequacy since there are more resources for production and goods and services for production. However, such a view is inadequate when we consider the limitations of the implications.

The increase in production of more goods and services will mean that it is possible to satisfy the increasing demand brought about by rise in population and affluence of the society. Expansion of production capacity is made possible as some countries can increase their productivity and engage in trade to increase their consumption possibility. Improvement in research and development will raise productivity to increase production while the employment of more resources for production will both raise the level of output, allowing greater consumption of goods and services without reducing the consumption of other goods and services.

The expansion of resource capacity will mean that there are more resources available for the economy to increase production. This will allow the economy to raise production from one level to another without comprising the production of another good. Expansion of resource capacity is made possible when the economy can import resources from other countries or raise the rate of utilization of resources more efficiently to reduce wastage.

However, when we take a longer and dimensional discussion of the issue, it is quite impossible to eliminate the problem of scarcity when there is economic growth.

First, it is difficult to reduce the unlimited wants that are created by growth in population and greater affluence of the society as developing countries like India and China attain higher level of income. Consumer wants are further encouraged by the enterprises, making it difficult for countries to curb excessive rise in wants. Furthermore, high level of unequal distribution of income and wealth will prompt higher income group to create excessive demand to satisfy their wants instead of their needs.

Second, market imperfection and inefficiency will occur which may lead to misallocation of resources which implies that some of the resources are not able to create the optimal level of production to meet the rise in demand. Furthermore, the lack of perfect market information and lack of mobility in the distribution of resources and goods and services will mean that some groups of people in the economy may not be able to attain the resources and goods and services and thus, the problem of scarcity continues to prevail.

Third, the expansion of resource capacity which accounts for potential growth does not imply an increase in actual growth as there is underemployment or unemployment which means that the production capacity has not increased in the short-run. This will mean that the production capacity is unable to produce more goods and services to satisfy the excessive wants.

Lastly, economic growth will not solve the problem of scarcity as long as the production has not attained pareto optimality whereby there is an increase in production of one goods without the reduction in another good. In the economic production condition where opportunity cost occurs when production of increases, the problem of scarcity will still exist.

In conclusion, it must be noted that the problem of scarcity can never be eradicated as long as wants are unlimited and resources are limited but a short term rise in economic growth will enable the increase in production will help to alleviate the problem of scarcity.