ch2( Economic Problems)

Chapter 2 Economic Problems:

Chapter 2 Economic Problems

Introduction:

Introduction Robbins definition of Economics The science which studies behaviour as a relationship between ends and scarce means which have alternate uses Definition  Basic Economic Problem Human needs are limited Food Clothing Shelter Humans desire more than their needs

Basic Economic Problem:

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

Problem of Choice:

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

How do People Choose ?:

How do People Choose ? Rank their choices based on the satisfaction derived Prioritization of wants Lata chooses option ‘a’ : buy gifts and cards Highest level of satisfaction Lata’s ranking of the available uses for her pocket money Uses Level of satisfaction Buy gifts and cards Highest Eat out with friends Just below (a) Buy music cassettes Just below (b) Purchase of shoes Just below (c) Purchase of T-shirts Lowest

Opportunity Cost:

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 Lata’s opportunity cost is ‘eating out with friends’ Highlights the economic principle: ‘There is no such thing as a free lunch’

Central Problems of an Economy:

Central Problems of an Economy What to produce and what quantities to produce ? Should the emphasis be on agriculture, manufacturing or services Should the economy produce public goods or private goods How much of the chosen goods and services should be produced How to produce ? What technique of production should be used - Labour intensive or capital intensive For whom to produce ? How should the output be distributed amongst different social groups

Other Problems:

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

Other Problems:

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

Production Possibility Curve:

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 0 X R Quantity of pencils per week Quantity of Wheat per week

Production Possibility Curve:

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 0 X R Quantity of pencils per week Quantity of Wheat per week Pt R – all resources used to produce wheat

Production Possibility Curve:

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 0 X R Quantity of pencils per week Quantity of Wheat per week Pt X – all resources used to produce pencils

Production Possibility Curve:

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 0 29 X 5 R S Quantity of pencils per week Quantity of Wheat per week Pt S – one combination of two goods that can be produced

Production Possibility Curve:

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 0 29 70 X 3 5 R S U Quantity of pencils per week Quantity of Wheat per week Pt U – one combination of two goods that can be produced

Features of PPC:

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 0 29 70 X 3 5 R S U Quantity of pencils per week Quantity of Wheat per week

Features of PPC:

Features of PPC More of one good means less of the other along the PPC 0 29 P 5 P S Quantity of pencils per week Quantity of Wheat per week Initial point S

Features of PPC:

Features of PPC More of one good means less of the other along the PPC 0 29 P P 5 S Quantity of pencils per week Quantity of Wheat per week Increasing output of pencils

Features of PPC:

Features of PPC More of one good means less of the other along the PPC 0 29 70 3 5 S U Quantity of pencils per week Quantity of Wheat per week P P Decreases output of wheat

Features of PPC:

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 0 Quantity of pencils per week Quantity of Wheat per week P P Given PPC - PP

Features of PPC:

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 0 7 10 A Quantity of pencils per week Quantity of Wheat per week P P Initial production point A

Features of PPC:

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 0 7 10 A Quantity of pencils per week Quantity of Wheat per week P 9.5 8 P When output of pencils increases by 1 unit, output of wheat reduces by 0.5 unit

Features of PPC:

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 Take another production point B 0 7 12 5 10 A B Quantity of pencils per week Quantity of Wheat per week P 9.5 8 P

Features of PPC:

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 When output of pencils increases by 1 unit, output of wheat falls by 1.5 units 0 7 12 5 10 A B Quantity of pencils per week Quantity of Wheat per week P 9.5 3.5 8 13 P

Features of PPC:

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 0 7 12 5 10 A B Quantity of pencils per week Quantity of Wheat per week P 9.5 3.5 8 13 P

Features of PPC:

Features of PPC A point inside the PPC reflects Under utilisation of resources Unemployment of resources Inefficient allocation of resources 0 P P Quantity of pencils per week Quantity of Wheat per week C Initial PPC – PP Take a pt C inside the PPC

Features of PPC:

Features of PPC 0 7 P 5 P Quantity of pencils per week Quantity of Wheat per week C At point C output of pencils is 7 units and wheat is 5 units A point inside the PPC reflects Under utilisation of resources Unemployment of resources Inefficient allocation of resources

Features of PPC:

Features of PPC Pt A : More wheat, same pencils as pt C Pt C is more inefficient than pt A 0 7 P 5 P A Quantity of pencils per week Quantity of Wheat per week C A point inside the PPC reflects Under utilisation of resources Unemployment of resources Inefficient allocation of resources

Features of PPC:

Features of PPC Pt A : More wheat, same pencils as pt C Pt B : More pencils, same wheat as pt C Pt C is more inefficient than pts A & B 0 7 P 5 P A B Quantity of pencils per week Quantity of Wheat per week C A point inside the PPC reflects Under utilisation of resources Unemployment of resources Inefficient allocation of resources

Features of PPC:

Features of PPC Pt A : More wheat, same pencils as pt C Pt B : More pencils, same wheat as pt C Pt D : More pencils, more wheat than pt C Pt C is more inefficient than pts A, B & D 0 7 P 5 P A B Quantity of pencils per week Quantity of Wheat per week D C A point inside the PPC reflects Under utilisation of resources Unemployment of resources Inefficient allocation of resources

Features of PPC:

Features of PPC Point outside the PPC is unattainable given existing resources 0 A Quantity of pencils per week Quantity of Wheat per week P P

Features of PPC:

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 0 A Quantity of pencils per week Quantity of Wheat per week P P

Features of PPC:

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 0 P’ A Quantity of pencils per week Quantity of Wheat per week P P’ P