Introduction to economic problem

Prepared By:- KVS, Delhi Region

An introduction to Economic Problems


ROBBINS DEFINITION OF ECONOMICS

The science which studies human behaviour as a relationship

between ends and scarce means which have alternate uses.


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


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


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


Central Problems of an EconomyWhat to produce

and what quantities

• 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 producedS

PROBLEM OF ALLOCATION

OF RESOURCES


For whom to produce ?

DISTRIBUTION OF FACTOR INCOME TO RESOURCES


How to produce ?

PROBLEM OF CHOICE OF TECHNIQUE OF PRODUCTION

• LABOUR INTENSIVE• CAPITAL INTENSIVE


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.


Other ProblemsProblem 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 creamProduction Labour CapitalTechnique

A 5 4B 5 5C 6 4D 6 6

Output produced using 4 units

of capital and 5 units of labour

Production Output Technique (in litres)

A 10B 8C 7D 6Option A is the most efficient method of production


Other ProblemsGrowth 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 CurveDepicts 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 wheat per week

Quan

tity

of ta

nk p

er w

eek



0 X

R


Quan

tity

of ta

nk p

er w

eek

Pt R – all resources used to produce tank



0 X

R


Quan

tity

of ta

nk p

er w

eek

Pt X – all resources used

to produce wheat



0 29 X

5R S


Quan

tity

of t

ank

per w

eek

Pt S – one combination of two goods that

can be produced



0 29 70 X

3

5R S

U


Quan

tity

of ta

nk p

er w

eek

Pt U – one combination of two goods that can be produced


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

5R S

U


Quan

tity

of ta

nk p

er w

eek


Features of PPC• More of one good means less of the other along the PPC

0 29 P

5P S


Quan

tity

of ta

nk p

er w

eek

Initial point S


Features of PPC• More of one good means less of the other

along the PPC

0 29 P

P5

S


Quan

tity

of ta

nk p

er w

eek

Increasing output of wheat


Features of PPC• More of one good means less of the other

along the PPC

0 29 70

3

5S

U


Quan

tity

of ta

nk p

er w

eek

P

P

Decreases output of tank


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

0Quantity of wheat per week

Quan

tity

of ta

nk p

er w

eek

P

P

Given PPC - PP




0 7

10 A


Quan

tity

of ta

nk p

er w

eek P

P

Initial production point A




0 7

10 A


Quan

tity

of ta

nk p

er w

eek

P

9.5

8 P

When output of wheat increases by 1 unit, output of tank reduces by 0.5 unit




0 7 12

5

10 A

B


Quan

tity

of ta

nk p

er w

eek P

9.5

8 P




• 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


Quan

tity

of ta

nk p

er w

eek

P

9.5

3.5

8 13 P


Features of PPC

• A point inside the PPC reflects– Under utilisation of resources– Unemployment of resources– Inefficient allocation of resources

0 P

P


Quan

tity

of ta

nk p

er w

eek

C

• Initial PPC – PP• Take a pt C inside the

PPC


Features of PPC


0 7 P

5

P


Quan

tity

of ta

nk p

er w

eek

C

At point C output of wheat is 7 units and tank is 5 units


Features of PPC


0 7 P

5

P A


Quan

tity

of ta

nk p

er w

eek

C


Features of PPC


0 7 P

5

P A

B


Quan

tity

of ta

nk p

er w

eek

C


Features of PPC


0 7 P

5

P A

B


Quan

tity

of ta

nk p

er w

eek

D

C


Features of PPC• Point outside the PPC is unattainable

given existing resources

0

A


Quan

tity

of ta

nk p

er w

eek

P

P


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


Quan

tity

of ta

nk p

er w

eek

P

P


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


Quan

tity

of ta

nk p

er w

eek

P P’

P


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?


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:-

Introduction to economic problem

Technology

Transcript of Introduction to economic problem