The choice between military products and the provision of health care illustrates the problem of “opportunity cost”. Explain the nature of this problem, using a production possibility curve to help you.
Opportunity costs are the alternatives foregone by making an economic decision. A production possibility curve shows the maximum combination of goods or services that can be produced by an economy in a given time period, if all the resources in the economy are being used fully and efficiently. Because people have unlimited wants but limited resources (FOP), the country has to make economic decisions. A country can produce anywhere on the curve (except inside which means they are inefficient or outside meaning they need increase in resources) so in terms of choosing to use resources between military products and the provision of health care, the government has to choose how much of each good should be produced. If produced at A, the government is using resources to make 100 units worth of provision of health care while having an output of 1180 units military products. On the other hand, the government can also use the same amount of output to make 1200 units of provision of health care with 80 units of military products. Choosing to produce at A makes an opportunity cost of emphasizing on health care therefore less healthy people (costs 1100 units of health care); choosing to produce at B makes an opportunity cost of 1100 units of military products.
Depending on the current economic decisions, the specific government has to make that choice. The pros of producing at A is these military products would protect the country and can bring in capital if the products are sold overseas. The revenue from the products would increase government revenue to be used for other goods and services. The cons is that it may not help the country’s development, one of its macroeconomic goals. This leads into the pros of producing at B which is the improvement of the Human Development Index (HDI); thus improving economic development. For example, Ghana has a life expectancy of about 59 years old for males and 60 for females. Instead of using resources of military equipment, the resources used to improve health care for the people would improve the HDI. In terms of stakeholders, the government would benefit from producing at A but the consumers, or the poor who need health care, would improve from producing at B. Another economic goal is employment, which would improve with production of military equipment because of the increase of jobs. Overall, for developing countries such as Ghana, provision of health care may be a better decision since the opportunity cost is less.
