Introduction to economic problem

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Introduction to economic problem

  1. 1. Prepared By:- KVS, Delhi Region An introduction to Economic Problems
  2. 2. 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.
  3. 3. 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
  4. 4. 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
  5. 5. Prepared By:- KVS, Delhi Region CENTRAL PROBLEMS ARE THE SAME IN ALL DIFFERENT ECONOMIC SYSTEMS • Capitalistic Economy • Socialistic Economy • Mixed Economy
  6. 6. 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
  7. 7. Prepared By:- KVS, Delhi Region For whom to produce ? DISTRIBUTION OF FACTOR INCOME TO RESOURCES
  8. 8. Prepared By:- KVS, Delhi Region How to produce ? PROBLEM OF CHOICE OF TECHNIQUE OF PRODUCTION • LABOUR INTENSIVE • CAPITAL INTENSIVE
  9. 9. 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.
  10. 10. 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 Production Labour Capital Technique 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. 11. 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
  12. 12. 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 0 X R Quantity of wheat per week Quantityoftankperweek
  13. 13. 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 0 X R Quantity of wheat per week Quantityoftankperweek Pt R – all resources used to produce tank
  14. 14. 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 0 X R Quantity of wheat per week Quantityoftankperweek Pt X – all resources used to produce wheat
  15. 15. 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 0 29 X 5 R S Quantity of wheat per week Quantityoftankperweek Pt S – one combination of two goods that can be produced
  16. 16. 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 0 29 70 X 3 5 R S U Quantity of wheat per week Quantityoftankperweek Pt U – one combination of two goods that can be produced
  17. 17. 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 5 R S U Quantity of wheat per week Quantityoftankperweek
  18. 18. Prepared By:- KVS, Delhi Region Features of PPC • More of one good means less of the other along the PPC 0 29 P 5 P S Quantity of wheat per week Quantityoftankperweek Initial point S
  19. 19. Prepared By:- KVS, Delhi Region Features of PPC • More of one good means less of the other along the PPC 0 29 P P 5 S Quantity of wheat per week Quantityoftankperweek Increasing output of wheat
  20. 20. Prepared By:- KVS, Delhi Region Features of PPC • More of one good means less of the other along the PPC 0 29 70 3 5 S U Quantity of wheat per week Quantityoftankperweek P P Decreases output of tank
  21. 21. 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 Quantityoftankperweek P P Given PPC - PP
  22. 22. 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 Quantityoftankperweek P P Initial production point A
  23. 23. 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 Quantityoftankperweek P 9.5 8 P When output of wheat increases by 1 unit, output of tank reduces by 0.5 unit
  24. 24. 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 Quantityoftankperweek P 9.5 8 P
  25. 25. 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 Quantityoftankperweek P 9.5 3.5 8 13 P
  26. 26. 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 Quantityoftankperweek C • Initial PPC – PP • Take a pt C inside the PPC
  27. 27. 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 Quantityoftankperweek C At point C output of wheat is 7 units and tank is 5 units
  28. 28. 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 Quantityoftankperweek C
  29. 29. 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 Quantityoftankperweek C
  30. 30. 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 Quantityoftankperweek D C
  31. 31. Prepared By:- KVS, Delhi Region Features of PPC • Point outside the PPC is unattainable given existing resources 0 A Quantity of wheat per week Quantityoftankperweek P P
  32. 32. 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 Quantityoftankperweek P P
  33. 33. 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 Quantityoftankperweek P P’ P
  34. 34. 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?
  35. 35. 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 Compiled by:-

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