Eco Revision ch- Scarcity, economic problem

Eco ch-1

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REVISION
Economics

2. Thought of
the day

4. WHY STUDY ECONOMICS?
The main reason for study of economics can be simplified to a
single word -SCARCITY

5. SCARCITY
Scarcityreferstothelimitationofsupplyinrelationtodemand
foracommodity.
Economicsisconcernedwithselectionofresourcesunder
conditionsofscarcity

6. RESOURCES
FACTORS OF PRODUCTION -FOP

7. ECONOMIC PROBLEM
ItisaproblemofCHOICEinvolvingsatisfactionofunlimited
wantsoutoflimitedresourceshavingalternativeuses.

8. REASONS FOR ECONOMIC PROBLEM
1.SCARCITYOFRESOURCES:Resourcesarelimitedin
relationtotheirdemandandeconomycannotproduceall
whatpeoplewant.

9. REASONS FOR ECONOMIC PROBLEM
2.UNLIMITEDHUMANWANTS:Humanwantsarenever
ending,i.e.theycanneverbefullysatisfied.Assoonasone
wantissatisfied,anothernewwantemerges.

10. REASONS FOR ECONOMIC PROBLEM
3.ALTERNATIVEUSES:Resourcesarenotonlyscarce,but
theycanalsobeputtovarioususes.Itmakeschoiceamong
resourcesmoreimportant.

11. ECONOMICS
Economicsisasocialsciencewhichstudiesthewayasociety
choosestouseitslimitedresources,whichhavealternative
uses,toproducegoodsandservicesandtodistributethem
amongdifferentgroupsofpeople.

12. MICRO AND MACRO ECONOMICS
MICRO MACRO

13. Basis Microeconomics Macroeconomics
MeaningMicroeconomicsdealswiththe
behaviourofindividual
economicunits.
Macroeconomicsisthestudyof
theeconomyasawhole.
Tools DemandandSupply AggregateDemandandAggregate
Supply
ObjectiveTodeterminethepriceofa
commodityorfactorsof
production.
Todeterminetheincomeand
employmentleveloftheeconomy.
Other
Name
Itisalsoknownas‘Pricetheor
y’.
Itisalsoknownas‘Incomeand
EmploymentTheory’
ExampleIndividualincome,individual
output.
NationalIncome,nationaloutput.
AggregationItinvolveslimiteddegreeof
aggregation.
Itinvolvesthehighestdegreeof
aggregation.

14. POSITIVE AND NORMATIVE
ECONOMICS

15. DISTINGUISH BETWEEN
Differences Positive EconomicsNormative Economics
Meaning It deals with the things “
as they are”
It deals with the things
“as they should be”
Basis Based upon real facts Based upon individual
opinions
VerificationIt can be verified with
actual data
It cannot be verified
Nature Pure and neutral between
ends
Suggestive & optimum in
nature
Purpose It aims to make real
description of an economic
activity.
It aims to determine
the ideals.
Value JudgmentsIt does not give any value
judgments.
It gives value
judgements.

16. CENTRAL PROBLEMS OF AN ECONOMY
Production,distributionanddispositionofgoodsandservices
arethebasiceconomicactivitiesoflife.Inthecourseofthese
activities,everysocietyhastofacescarcityofresources.
Becauseofthisscarcity,everysocietyhastodecidehowto
allocatethescarceresources.ItleadstofollowingCentral
ProblemsofanEconomy.

17. WHAT TO PRODUCE
Thisprobleminvolvesselectionofgoodsandservicestobe
producedandthequantitytobeproducedofeachselected
commodity
GuidingPrinciple:Allocatetheresourcesinsuchamannerwhich
givesmaximumaggregatesatisfaction.

18. HOW TO PRODUCE
Thisproblemsreferstoselectionoftechniquetobeusedfor
productionofgoodsandservices.Generally,techniquesare
classifiedasLIT&CIT.
GuidingPrinciple:CombineFOPinsuchamannersothat
maximumoutputisproducedatminimumcost,usingleast
possiblescarceresources.

19. FOR WHOM TO PRODUCE
Thisproblemreferstoselectionofcategoryofpeoplewhowill
ultimatelyconsumethegoods,i.e.Whethertoproducegoodsfor
morepoorandlessrichormorerichandlesspoor.
GuidingPrinciple:Ensurethaturgentwantsofeachproductive
factorarefulfilledtothemaximumpossibleevent.

20. OPPORTUNITY COST
It is the cost of next best alternative foregone.

21. PRODUCTION POSSIBILITY FRONTIER
Itreferstoagraphicalrepresentationofpossiblecombinationof
twogoodsthatcanbeproducedwithgivenresourcesand
technology
1. Resources are fixed
2. They can be transferred
3. Only two goods can be produced.
4. Resources are fully and efficiently utiliised
5.Resources are not equally efficient in production of all
products
6. Technology remains constant

22. FIGURE

23. SCHEDULE
Production
Possibilities
[OR Combination]
Guns Butter MRT
A 21 0 -
B 20 1 1:1
C 18 2 2:1
D 15 3 3:1
E 11 4 4:1
F 6 5 5:1
G 0 6 6:1

24. Explanation
When points A, B, C, D, E, F, & G are joined we get a
curve AG, known as ‘Production Possibility Frontier.’
AG curve shows the maximum limit of production of
guns and butter.
Every point on PPC [like A, B, C, D, E, F& G] in figure
indicates full employment and efficient use of
resources.

25. CHARACTERISTICS OF PPF
1.PPFSLOPESDOWNWARDS:Moreofonegoodscanbe
producedbyonlybytakingresourcesawayfromthe
productionofanothergood.
2.PPFisCONCAVESHAPE:BecauseofincreasingMRT.MRT
increasesbecauseitisassumedthatnoresourceis
equallyefficientinproductionofallgoods.

26. ATTAINABLE AND UNATTAINABLE COMBINATIONS

27. CHANGE IN PPC
1.SHIFTINPPC:Whenthereischangeinproductive
capacitywithrespectofboththegoods.
2.ROTATIONOFPPC:Whenthereischangeinproductive
capacitywithrespecttoonlyonegood.