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An introduction to Economic Problems

An introduction to Economic Problems. ROBBINS DEFINITION OF ECONOMICS. T he 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 ?

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An introduction to Economic Problems

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  1. An introduction to Economic Problems

  2. ROBBINS DEFINITION OF ECONOMICS The 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 Resource Alternate uses

  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 CapitalTechnique 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 R Quantity of tank per week 0 X Quantity of wheat 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 R Pt R – all resources used to produce tank Quantity of tank per week 0 X Quantity of wheat per week

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

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

  16. R S 5 Quantity of tank per week U 3 0 29 70 X Quantity of wheat per week 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 Pt U – one combination of two goods that can be produced

  17. R S 5 Quantity of tank per week U 3 0 29 70 X Quantity of wheat per week 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

  18. P S 5 Quantity of tank per week P 0 29 Quantity of wheat per week Features of PPC • More of one good means less of the other along the PPC Initial point S

  19. P S 5 Quantity of tank per week P 0 29 Quantity of wheat per week Features of PPC • More of one good means less of the other along the PPC Increasing output of wheat

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

  21. P Quantity of tank per week P 0 Quantity of wheat per week 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 Given PPC - PP

  22. P A 10 Quantity of tank per week P 0 7 Quantity of wheat per week 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 Initial production point A

  23. P A 10 9.5 Quantity of tank per week P 0 7 8 Quantity of wheat per week 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 wheat increases by 1 unit, output of tank reduces by 0.5 unit

  24. P A 10 9.5 Quantity of tank per week B 5 P 0 7 8 12 Quantity of wheat per week 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

  25. P A 10 9.5 B 5 Quantity of tank per week 3.5 P 0 7 8 12 13 Quantity of wheat per week 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

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

  28. P A Quantity of tank per week 5 C 0 P 7 Quantity of wheat per week Features of PPC • A point inside the PPC reflects • Under utilisation of resources • Unemployment of resources • Inefficient allocation of resources

  29. P A Quantity of tank per week B 5 C 0 P 7 Quantity of wheat per week Features of PPC • A point inside the PPC reflects • Under utilisation of resources • Unemployment of resources • Inefficient allocation of resources

  30. P A D Quantity of tank per week B 5 C 0 P 7 Quantity of wheat per week Features of PPC • A point inside the PPC reflects • Under utilisation of resources • Unemployment of resources • Inefficient allocation of resources

  31. P A Quantity of tank per week 0 P Quantity of wheat per week Features of PPC • Point outside the PPC is unattainable given existing resources

  32. P A Quantity of tank per week 0 P Quantity of wheat per week 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

  33. P’ P A Quantity of tank per week P’ 0 P Quantity of wheat per week 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

  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. Compiled by:- • 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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