8/13/2019 Economics Class 11 Unit 2-Basic-Economic-Issues

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Basic Economic Issues: Scarcity, Choice, Allocation of resources,

Production possibility Curve (PPC)Scarcity:

The scarcity of goods is the basic characteristics of economic world. This

characteristic create economic problem. The economic goods and human resources arealways scarce. Only the natural resources such as: air, water and sunlight are found in

unlimited quantity. The economic goods should be distributed among the people due to

scarcity.The word scarcity is used in relative sense. All the means are scarce in relation to

human wants. There is scarcity of productive resources such as land, labour, raw

materials, machinery, equipments, etc. in the world. Therefore, it is impossible to produceall goods and services to satisfy all wants of the people.

Choice:Resources have alternative uses. For Eg: A plot of land can be used either for

producing paddy or wheat or vegetables or fruits, etc. So, choice is necessary due to

scarcity of resources. All the resources are limited compare to demand. Therefore, the

society must have to choose which commodity is to produce and which commodity is tosacrifice. Hence, the problem of choice arises.

People have to make choice while spending their income. They have to think how

much to spend and how much to save out of their income. Similarly, it is also necessaryto decide how much to spend on food, how much on dress and how much recreation. In

this way, choice is the basic economic problem.

Allocation of resources:Resources are scarce and have alternative uses. Therefore, allocation of resources is

the central economic problem. Here, allocation of resources means distribution of

resources in the economy. In a free market economy, the scarce economic resources areallocated in the following ways:

Determining what will be produced:The first resource allocation function is to decide what goods and services

will be produced. It is because resources are scarce.

Determining how it will be produced:The second allocation function is to decide how goods and services will be

produced. It is because there are different ways of producing a product.

Determining whom to produced:This third function is to decide who will get the goods and services which

are produced. It is because economic resources are scarce.

In a free market economy, allocation of resources is determined by price

mechanism through demand and supply of resources.

Production Possibility Curve(PPC):The production possibility curve is a tool used to explain the problem of scarcity

and choice. A curve which shows the production possibilities that can be produced withgiven resources and technology is called production possibility curve. This curve is also

called production fontire or production transformation curve. According to David Begg:

The production possibility curve shows maximum combination of output that the

economy can produced using all available resources.

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Assumptions:The PPC curve is based on the following assumptions:

I. Only two goods are produced in the economy that is x and y.II. There is full employment of resources.III. The supply of factors are fixed.IV. The time period is short.V. The production techniques is given and constant.The concept of production possibility curve is shown in the following table and

diagram.Combinations Productions of x

(Capital goods)

Production of y

(Consumer goods)

A 0 15

B 1 14

C 2 12

D 3 9

E 4 5

F 5 0

This table shows the production possibilities of x and y goods that can be

produced with given resources. If all available resources are used for the production of y

goods, the economy can produce 15 units of y and 0 units of x. Similarly if all availableresources are used in the production of x goods, the economy can produce 5 units of xand 0 units of y. These two are extreme points in between these there are various other

possibilities.

In this diagram, AF is the PPC curve. The economy can produced anycombination lying on this curve i.e. A, B, C, D, E & F. The point H lying above the curve

cannot be obtained because of scarcity of resources. Similarly, the point G inside the

curve is inefficient because the resources are unutilized. The economic cannot produceeither inside or outside the PPC curve. Therefore, it is called production possibility

frontire.

Shift in Production Possibility Curve:

I. Upward shift in PPC:If there is increase in production capacity in the economy the PPC Curve

shifts upward to the right. The increase in the size of working population, increase

in the labour productivity and technology progress shift PPC Curve upward. Thiscan be shown in the following diagram:

In this diagram, AF is the initial PPC curve. Now, with the increase in labour

force, labour production & introducation of new technology increases the productivecapacity of the economy. As a result, PPC curve shift upward in the form of A1F1.

II. Downward shift in PPC:If there is decrease in productive capacity in the economy the PPC curve

shift downward to the left. The decrease in the size of working population

decrease in labour productivity and depletion of natural resources shift PPC curvedownward. This can be shown in the following diagram.

In this diagram, AF is the original production possibility curve due to the

decrease in productive capacity of economy because of decrease in labour force,

decrease in labour productivity and depletion of natural resources causes thesecurve shift downward in the form of A1F1.