economics problem and PPC

1. An economy exists because of two basic facts. First, human wants for goods and services are
unlimited, and secondly, productive resources with which to produce goods and services are
scarce. With our wants being virtually unlimited and resources scarce, we cannot satisfy all our
wants and desires by producing everything we want. It is this basic problem which has long been
the concern of economists.
The resources being found in limited quantity, the goods they can produce are also limited.
Goods are thus scarce because the productive resources are scarce. Since the resources are
limited in relation to our wants, we should get most out of what we have. Thus a society is faced
with the problem of choice, the choice among the vast array of wants that are to be satisfied.
The following are the basic problems in an economy;
i. The problem of allocation of resources
The basic problem confronting an economy is “what to produce?” so as to satisfy the wants of
the people. The problem of what goods are to be produced and in what quantities arises directly
through the scarcity of resources. If the resources were unlimited, the problem of what goods to
be produced would not have arisen because in that case we should have been able to produce all
goods we wanted and also in the desired quantities. But because resources are in fact scarce
relative to human wants, an economy must choose among various goods and services.
ii. Choice of production method.
There are various alternative methods of producing goods and a society has to choose among
them. The problem of “how to produce?” means which combination of resources is to be used
for the production of goods and which technology is to be made use of for their production.
Scarcity of resources demands that goods should be produced with the most efficient method.
If the economy uses its resources inefficiently, the output will be less and there will be
unnecessary loss of goods which otherwise would have been available supplies and the prices of
the factor of production. The criterion for the choice of a method of production should therefore
be the cost of production per unit of output involved in various methods.

2. iii. The problem of the distribution of national product
This is the problem of sharing of the national product among the various individuals and classes
in the society. Who should get how much from the total output of goods and services is a
question concerning social justice or equity. It is important to note that the distribution of
national product depends upon the distribution of money income.
Those people who have larger incomes would have larger capacity to buy larger entitlement for
goods and hence will get greater share of output. Those who have low incomes would have less
purchasing power to buy things and will therefore be able to obtain a small share of output. More
equal is the distribution of income, more equal will be the distribution of national product.
iv. The problem of economic efficiency
Resources being scarce, it is desirable that they should be most efficiently used. The production
is said to be efficient if the productive resources are allocated among production of various
goods in such a way that through any reallocation it is impossible to produce more of one good
without reducing the output of any other goods.
Production Possibility Frontier (curve) is a graphical representation of alternative production
possibilities facing an economy. As the total productive resources of the economy are limited,
the economy has to choose between different goods. It has, therefore, to be decided which goods
are to be produced more and which one less. In deciding what amounts of different goods are to
be produced, the society would in fact be deciding about the allocation of resources among
different possible goods.
Production Possibility Curve and the Basic Economic Problems
i. Scarcity, Choice, and Resource Allocation
According to the problem of scarcity, because of the limited availabilities of the resources, all
wants of the society for goods cannot be satisfied; if a society desires to allocate more resources
to the production of one good, it has to withdraw resources from the production of other goods.
Given the amount of resources, the economy has to operate on the given production possibility
curve.

3. When we increase the production of one commodity by moving along the production possibility
curve, we have to reduce the production of some other commodity. If the given resources are
being fully used and technology remains constant, an economy cannot increase the production of
both the goods represented on the two axes. The problem of resource allocation involves what
and how the goods will be produced. Which goods to be produced and in what quantities implies
that on what point of the production possibility curve the economy should operate. In a free
market economy, how the resources are allocated between the two goods on a given production
curve is determined by the demand of the consumers.
ii. The Problem of Unemployment and Under-utilization of Resources
When all resources are being fully used, the economy will operate at a point on the production
possibility curve. But the economy will operate at a point on the production possibility curve if
the aggregate demand is large enough to buy the total output produced by the full employment of
resources. If the aggregate demand is somehow smaller, the economy will not be able to use its
productive capacity fully, that is, it will be able to utilize its resources fully, which will result in
unemployment and under-employment of resources.
Microeconomics; Microeconomics is the study of economics in a miniature scale. It breaks down
the economy into attributes and analyzes each specific component. Key features are to explore
the possibilities of lowering production costs and increasing income.
Macroeconomics; Macroeconomics is the study of the economy as a whole. The economy’s
actions are looked at together. It reflects on the governmental aspect of the economy, regarding
tax and regulation actions they address.
The Relationship between Microeconomics and Macroeconomics
Microeconomics is generally the study of individuals and business decisions; macroeconomics
looks at higher up country and government decisions. Macroeconomics and microeconomics,
and their wide array of underlying concepts, have been the subject of a great deal of writings
Microeconomics is the study of decisions that people and businesses make regarding the

4. allocation of resources and prices of goods and services. This means also taking into account
taxes and regulations created by governments. Microeconomics focuses on supply and demand
and other forces that determine the price levels seen in the economy. For example,
microeconomics would look at how a specific company could maximize its production and
capacity so it could lower prices and better compete in its industry.
Macroeconomic, on the other hand, is the field of economics that studies the behavior of the
economy as a whole and not just on specific companies, but entire industries and economies.
This looks at economy-wide phenomena, such as Gross national product t (GDP) and how it is
affected by changes in unemployment, national income, rate of growth, and price levels. For
example, macroeconomics would look at how an increase/decrease in net exports would affect a
nation's capital account or how GDP would be affected by unemployment rate.
There is an obvious relationship between microeconomics and macroeconomics in that aggregate
production and consumption levels are the result of choices made by individual households and
firms, and some macroeconomic models explicitly make this connection. Most of the economic
topics covered on television and in newspapers are of the macroeconomic variety, but it’s
important to remember that economics is about more than just trying to figure out when the
economy is going to improve and what the Fed is doing with interest rates.