Introduction to economic problem
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Transcript of Introduction to economic problem
Prepared By:- KVS, Delhi Region
An introduction to Economic Problems
Prepared By:- KVS, Delhi Region
ROBBINS DEFINITION OF ECONOMICS
The 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 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
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For whom to produce ?
DISTRIBUTION OF FACTOR INCOME TO RESOURCES
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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 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
Prepared By:- KVS, Delhi Region
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
Prepared By:- KVS, Delhi Region
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
Prepared By:- KVS, Delhi Region
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
Pt R – all resources used to produce tank
Prepared By:- KVS, Delhi Region
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
Pt X – all resources used
to produce wheat
Prepared By:- KVS, Delhi Region
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 29 X
5R S
Quantity of wheat per week
Quan
tity
of t
ank
per w
eek
Pt S – one combination of two goods that
can be produced
Prepared By:- KVS, Delhi Region
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 29 70 X
3
5R S
U
Quantity of wheat per week
Quan
tity
of ta
nk p
er w
eek
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
0 29 70 X
3
5R S
U
Quantity of wheat per week
Quan
tity
of ta
nk p
er w
eek
Prepared By:- KVS, Delhi Region
Features of PPC• More of one good means less of the other along the PPC
0 29 P
5P S
Quantity of wheat per week
Quan
tity
of ta
nk p
er w
eek
Initial point S
Prepared By:- KVS, Delhi Region
Features of PPC• More of one good means less of the other
along the PPC
0 29 P
P5
S
Quantity of wheat per week
Quan
tity
of ta
nk p
er w
eek
Increasing output of wheat
Prepared By:- KVS, Delhi Region
Features of PPC• More of one good means less of the other
along the PPC
0 29 70
3
5S
U
Quantity of wheat per week
Quan
tity
of ta
nk p
er w
eek
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
0Quantity of wheat per week
Quan
tity
of ta
nk p
er w
eek
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
0 7
10 A
Quantity of wheat per week
Quan
tity
of ta
nk p
er w
eek 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
0 7
10 A
Quantity of wheat per week
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
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 7 12
5
10 A
B
Quantity of wheat per week
Quan
tity
of ta
nk p
er w
eek P
9.5
8 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 process
• Gives rise to concave shape of PPC
0 7 12
5
10 A
B
Quantity of wheat per week
Quan
tity
of ta
nk p
er w
eek
P
9.5
3.5
8 13 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
Quan
tity
of ta
nk p
er w
eek
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
Quan
tity
of ta
nk p
er w
eek
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
Quan
tity
of ta
nk p
er w
eek
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
Quan
tity
of ta
nk p
er w
eek
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
Quan
tity
of ta
nk p
er w
eek
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
Quan
tity
of ta
nk p
er w
eek
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 resources
• Improvements in productivity
0
A
Quantity of wheat per week
Quan
tity
of ta
nk p
er w
eek
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 resources
• Improvements in productivity
0
P’
A
Quantity of wheat per week
Quan
tity
of ta
nk p
er w
eek
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
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