Prepared By:- KVS, Delhi Region An introduction to Economic Problems

Prepared By:- KVS, Delhi Region ROBBINS DEFINITION OF ECONOMICS T he science which studies human behaviour as a relationship between ends and scarce means which have alternate uses.

Prepared By:- KVS, Delhi Region 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

Prepared By:- KVS, Delhi Region 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

Prepared By:- KVS, Delhi Region CENTRAL PROBLEMS ARE THE SAME IN ALL DIFFERENT ECONOMIC SYSTEMS Capitalistic Economy Socialistic Economy Mixed Economy

Prepared By:- KVS, Delhi Region Central Problems of an Economy What 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

Prepared By:- KVS, Delhi Region For whom to produce ? DISTRIBUTION OF FACTOR INCOME TO RESOURCES

Prepared By:- KVS, Delhi Region How to produce ? PROBLEM OF CHOICE OF TECHNIQUE OF PRODUCTION LABOUR INTENSIVE CAPITAL INTENSIVE

Prepared By:- KVS, Delhi Region 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.

Prepared By:- KVS, Delhi Region 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 ProductionLabourCapital Technique A54 B 55 C64 D66 Output produced using 4 units of capital and 5 units of labour ProductionOutput Technique(in litres) A10 B 8 C7 D6 Option A is the most efficient method of production

Prepared By:- KVS, Delhi Region 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

Prepared By:- KVS, Delhi Region 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 0X R Quantity of wheat per week Quantity of tank per week

Prepared By:- KVS, Delhi Region 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 0X R Quantity of wheat per week Quantity of tank per week Pt R – all resources used to produce tank

Prepared By:- KVS, Delhi Region 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 0X R Quantity of wheat per week Quantity of tank per week Pt X – all resources used to produce wheat

Prepared By:- KVS, Delhi Region 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 029X 5 R S Quantity of wheat per week Quantity of tank per week Pt S – one combination of two goods that can be produced

Prepared By:- KVS, Delhi Region 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 02970X 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

Prepared By:- KVS, Delhi Region 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 02970X 3 5 R S U Quantity of wheat per week Quantity of tank per week

Prepared By:- KVS, Delhi Region Features of PPC More of one good means less of the other along the PPC 029 P 5 P S Quantity of wheat per week Quantity of tank per week Initial point S

Prepared By:- KVS, Delhi Region Features of PPC More of one good means less of the other along the PPC 029 P P 5 S Quantity of wheat per week Quantity of tank per week Increasing output of wheat

Prepared By:- KVS, Delhi Region Features of PPC More of one good means less of the other along the PPC S U Quantity of wheat per week Quantity of tank per week P P Decreases output of tank

Prepared By:- KVS, Delhi Region 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 wheat per week Quantity of tank per week P P Given PPC - PP

Prepared By:- KVS, Delhi Region 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 A Quantity of wheat per week Quantity of tank per week P P Initial production point A

Prepared By:- KVS, Delhi Region 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 A Quantity of wheat per week Quantity of tank per week P P When output of wheat increases by 1 unit, output of tank reduces by 0.5 unit

Prepared By:- KVS, Delhi Region 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 A B Quantity of wheat per week Quantity of tank per week P P

Prepared By:- KVS, Delhi Region 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 processIncreasing MOC arises due to difficulty is substituting factors in production process Gives rise to concave shape of PPCGives rise to concave shape of PPC A B Quantity of wheat per week Quantity of tank per week P P

Prepared By:- KVS, Delhi Region 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 wheat per week Quantity of tank per week C Initial PPC – PP Take a pt C inside the PPC

Prepared By:- KVS, Delhi Region Features of PPC A point inside the PPC reflects – Under utilisation of resources – Unemployment of resources – Inefficient allocation of resources 0 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

Prepared By:- KVS, Delhi Region Features of PPC A point inside the PPC reflects – Under utilisation of resources – Unemployment of resources – Inefficient allocation of resources 0 7 P 5 P A Quantity of wheat per week Quantity of tank per week C

Prepared By:- KVS, Delhi Region Features of PPC A point inside the PPC reflects – Under utilisation of resources – Unemployment of resources – Inefficient allocation of resources 0 7 P 5 P A B Quantity of wheat per week Quantity of tank per week C

Prepared By:- KVS, Delhi Region Features of PPC A point inside the PPC reflects – Under utilisation of resources – Unemployment of resources – Inefficient allocation of resources 0 7 P 5 P A B Quantity of wheat per week Quantity of tank per week D C

Prepared By:- KVS, Delhi Region Features of PPC Point outside the PPC is unattainable given existing resources 0 A Quantity of wheat per week Quantity of tank per week P P

Prepared By:- KVS, Delhi Region 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 resourcesIncrease in quantum of resources Improvements in productivityImprovements in productivity 0 A Quantity of wheat per week Quantity of tank per week P P

Prepared By:- KVS, Delhi Region 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 resourcesIncrease in quantum of resources Improvements in productivityImprovements in productivity 0 P’ A Quantity of wheat per week Quantity of tank per week P P’ P

Prepared By:- KVS, Delhi Region 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?

Prepared By:- KVS, Delhi Region  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