Introduction to economic problem

1. An introduction to Economic Problems

2. ROBBINS DEFINITION OF ECONOMICS T he science which studies human behaviour as a relationship between ends and scarce means which have alternate uses.

3. Problem of Choice Which wants should be satisfied ? To which use should a resource be put ? Resources have alternate uses Eg :- Tomatoes used - Juice - Sandwich - Vegetables - Salad Alternate uses Resource

4. Basic Economic Problem Human wants are Unlimited wants Scarce resources Land Labour Capital Scarcity implies insufficient availability of resources to meet all wants Scarcity leads to problem of choice

5. CENTRAL PROBLEMS ARE THE SAME IN ALL DIFFERENT ECONOMIC SYSTEMS Capitalistic Economy Socialistic Economy Mixed Economy

6. Central Problems of an Economy

7. For whom to produce ? DISTRIBUTION OF FACTOR INCOME TO RESOURCES

8. How to produce ? PROBLEM OF CHOICE OF TECHNIQUE OF PRODUCTION LABOUR INTENSIVE CAPITAL INTENSIVE

9. Opportunity Cost Defined as the benefit lost in terms of the next best alternative foregone when a choice is made. Helps view the true cost of decision making.

10. Other Problems Problem of Fuller Utilization of Resources Resources should be used to full potential There should be no wastage Resources should be utilised efficiently An ‘efficient method of production’ Least resources required for a given output Maximum output obtained for given resources Production techniques to produce 10 litres of ice cream Production Labour Capital Technique A 5 4 B 5 5 C 6 4 D 6 6 Output produced using 4 units of capital and 5 units of labour Production Output Technique (in litres ) A 10 B 8 C 7 D 6 Option A is the most efficient method of production

11. Other Problems Growth of Resources Resources can increase if there is: An increase in the quantum of resources Eg : New reserves of crude oil found Increase in labour Improvement in productivity Training labour to improve skills Improvements and advancements in technology

12. Production Possibility Curve Depicts all possible combination of two goods that an economy can produce with full and efficient utilization of given resources and state of technology X R Quantity of wheat per week Quantity of tank per week

13. Production Possibility Curve Depicts all possible combination of two goods that an economy can produce with full and efficient utilization of given resources and state of technology X R Quantity of wheat per week Quantity of tank per week Pt R – all resources used to produce tank

14. Production Possibility Curve Depicts all possible combination of two goods that an economy can produce with full and efficient utilization of given resources and state of technology X R Quantity of wheat per week Quantity of tank per week Pt X – all resources used to produce wheat

15. Production Possibility Curve Depicts all possible combination of two goods that an economy can produce with full and efficient utilization of given resources and state of technology 29 X 5 R S Quantity of wheat per week Quantity of tank per week Pt S – one combination of two goods that can be produced

16. Production Possibility Curve Depicts all possible combination of two goods that an economy can produce with full and efficient utilization of given resources and state of technology 29 70 X 3 5 R S U Quantity of wheat per week Quantity of tank per week Pt U – one combination of two goods that can be produced

17. Features of PPC No ‘ideal’ point on the curve All points on the PPC are equally efficient Economy needs to choose the point of operation 29 70 X 3 5 R S U Quantity of wheat per week Quantity of tank per week

18. Features of PPC More of one good means less of the other along the PPC 29 P 5 P S Quantity of wheat per week Quantity of tank per week Initial point S

19. Features of PPC More of one good means less of the other along the PPC 29 P P 5 S Quantity of wheat per week Quantity of tank per week Increasing output of wheat

20. Features of PPC More of one good means less of the other along the PPC 29 70 3 5 S U Quantity of wheat per week Quantity of tank per week P P Decreases output of tank

21. Features of PPC Marginal opportunity cost (MOC) increases as we move along the PPC MOC is the amount of one good that needs to be sacrificed per unit increase in production of the other good Quantity of wheat per week Quantity of tank per week P P Given PPC - PP

22. Features of PPC Marginal opportunity cost (MOC) increases as we move along the PPC MOC is the amount of one good that needs to be sacrificed per unit increase in production of the other good 7 10 A Quantity of wheat per week Quantity of tank per week P P Initial production point A

23. Features of PPC Marginal opportunity cost (MOC) increases as we move along the PPC MOC is the amount of one good that needs to be sacrificed per unit increase in production of the other good 7 10 A Quantity of wheat per week Quantity of tank per week P 9.5 8 P When output of wheat increases by 1 unit, output of tank reduces by 0.5 unit

24. Features of PPC Marginal opportunity cost (MOC) increases as we move along the PPC MOC is the amount of one good that needs to be sacrificed per unit increase in production of the other good 7 12 5 10 A B Quantity of wheat per week Quantity of tank per week P 9.5 8 P

25. Features of PPC Marginal opportunity cost (MOC) increases as we move along the PPC MOC is the amount of one good that needs to be sacrificed per unit increase in production of the other good Increasing MOC arises due to difficulty is substituting factors in production process Gives rise to concave shape of PPC 7 12 5 10 A B Quantity of wheat per week Quantity of tank per week P 9.5 3.5 8 13 P

26. Features of PPC A point inside the PPC reflects Under utilisation of resources Unemployment of resources Inefficient allocation of resources P P Quantity of wheat per week Quantity of tank per week C Initial PPC – PP Take a pt C inside the PPC

27. Features of PPC A point inside the PPC reflects Under utilisation of resources Unemployment of resources Inefficient allocation of resources 7 P 5 P Quantity of wheat per week Quantity of tank per week C At point C output of wheat is 7 units and tank is 5 units

28. Features of PPC A point inside the PPC reflects Under utilisation of resources Unemployment of resources Inefficient allocation of resources 7 P 5 P A Quantity of wheat per week Quantity of tank per week C

29. Features of PPC A point inside the PPC reflects Under utilisation of resources Unemployment of resources Inefficient allocation of resources 7 P 5 P A B Quantity of wheat per week Quantity of tank per week C

30. Features of PPC A point inside the PPC reflects Under utilisation of resources Unemployment of resources Inefficient allocation of resources 7 P 5 P A B Quantity of wheat per week Quantity of tank per week D C

31. Features of PPC Point outside the PPC is unattainable given existing resources A Quantity of wheat per week Quantity of tank per week P P

32. Features of PPC Point outside the PPC is unattainable given existing resources Can be achieved with growth of resources Resources grow by Increase in quantum of resources Improvements in productivity A Quantity of wheat per week Quantity of tank per week P P

33. Features of PPC Point outside the PPC is unattainable given existing resources Can be achieved with growth of resources Reflected by an outward shift in PPC Resources grow by Increase in quantum of resources Improvements in productivity P’ A Quantity of wheat per week Quantity of tank per week P P’ P

34. Questions for Self- Evaluation Define marginal opportunity cost. Why does an economic problem arise ? What are the basic problems of an economy? Explain the problem of “how to produce “ with the help of an example. Explain the central problem of “For whom to produce “ Why is PP curve concave in shape?

35. Mrs. Anita Bhardwaj KV, Vigyan Vihar Mrs .Monika Bajaj KV, Tagore Garden Mrs. Leena Singh KV, AGCR Mr. Sri Keshav KV, no.2 Delhi Cantt Mrs .Ritu Tanwar KV, AFS Rajokri Compiled by:-