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Micro economics topic central problem of an economy

Micro economics topic central problem of an economy

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Central Problem

of an

Economy

Central Problems of an Economy and the Concept of Production Possibility Frontier

Objectives

As we know, the need for economics stems from the basic problem of scarcity and choice. Similar to an individual every

economy also confronts these problems. It is because of this problem of scarce resources and the problem of choice that an

economy is pushed to face the central problems.

Scarcity of Resources and Problem of Choice:

• No matter, how well a particular economy is endowed with resources, these resources will be relatively scarce to

fulfil its unlimited wants. Moreover, these scarce resources have alternative uses and can be allocated to the

production of different goods and services. Allocation of resources to any particular use involves a cost in terms of

sacrifice of the other possible uses. To allocate the scarce resources in the best possible manner, an economy needs

to analyse the cost (i.e. the opportunity cost) of allocating the resources to one use while sacrificing the other uses.

For example, a piece of land can be used in a number of ways such as to grow crops, for building houses, for putting

up industries, etc. Therefore, the question here arises that to which particular use the piece of land should be

allocated. It depends on the economy to analyse what is presently more important (or need as per the present

scenario) and which use of land will be most beneficial for the economy as a whole.

• Thus, it is due to the scarce availability of resources (having alternative uses) to fulfil the different and competing

unlimited wants that an economy faces the problem of choice. From this discussion, we can conclude that the

problem of choice is a consequence of the problem of scarcity of resources.

Hence, the following are the three main causes that give rise to the central problems in an economy.

• Unlimited Human Wants- Human wants are never-ending and new wants keep arising.

• Limited Economic Resources- In relation to the unlimited wants, the resources required to satisfy them are

relatively scare and limited in supply.

• Alternative Use of Resources - Resources are not only scarce but also have alternative uses. This implies that a

choice has to be made among the various alternative uses of resources.

CHAPTER

Presented By: Mr. VIVEK RAJ

Contact: 9910221093

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Central Problem of an Economy Presented by: Mr. VIVEK RAJ Contact: 9910221093 2.2

Central Problems of an Economy

Due to allocative problems of scarce resources to alternative uses and the problem of choice every economy faces mainly

three central problems.These are:

Due to allocative problems of scarce resources to alternative uses and the problem of choice every economy faces

mainly three central problems.These are:

1.What to Produce and in What Quantities?

• The first problem that an economy faces is to decide which goods and services are to be produced. Besides this, the

economy also needs to decide in what quantities these goods and services should be produced. Let understand this

problem with the help of the following example.

• Let us suppose that an economy can produce only two types of goods viz. consumer goods (such as, rice, wheat,

Laptops, etc.) and capital goods (such as, machinery, guns, bridges, etc.). Now, with the amount of resources

available, the economy need to decide how much and which of the consumer goods should be produced and how

much and which of the capital goods should be produced. Thus the economy faces a choice as whether, it wants

more of capital goods and less of consumer goods or vice-versa.

2. How to Produce?

• The next problem that an economy faces is to decide which production technique is to be employed in the

production of the decided goods and services. The following are the two techniques of production.

• Labour Intensive Production Technique:

This production technique uses comparatively more of labour units than that of capital or machine. For example,

agricultural activities in India use labour intensive production technique.

• Capital Intensive Production Technique

This production technique uses comparatively more of capital or machine units than that of labour units. Example,

production of durable goods such as, T.V, refrigerator, etc. needs capital intensive technique.

• The economy needs to decide which particular production technique should be adopted in order to utilise its

available resources in the best possible efficient and optimal manner. India, for instance, is a labour abundant

country. Thus, it will be more beneficial for India to opt for labour intensive techniques, as this will not only

minimise the cost of production but will also help in reducing unemployment.

3. For Whom to Produce? Or the Problem of Distribution of National Product.

• This economic problem basically focuses on the distribution mix of the final goods and services produced. The

distribution of the final goods and services is equivalent to the distribution of National Income (or National Product)

among the factors of production such as land, labour, capital etc.

• The economy needs to decide a mechanism of distributing the final goods and services among the different

segments of population, so as to reduce the inequality of income. This problem is concerned about who gets more

or who gets less? Which goods should be made available free or at low (nominal) price and to which segment?

Production Possibility Curve (PPC)

Definition of PPC

The curve which shows the combinations of two goods and services that can be produced with fuller utilisation of a given

amount of resources in the most efficient way and with a given production technology. It is also known as Production

Possibility Frontier (or PPF) and Transformation Curve.

For whom to produce?

How to produce?

What to produce and in what quantities?

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CHAPTER Presented By: Mr. VIVEK RAJ 2 Central Problem of an Economy Contact: 9910221093 Central Problems of an Economy and the Concept of Production Possibility Frontier Objectives As we know, the need for economics stems from the basic problem of scarcity and choice. Similar to an individual every economy also confronts these problems. It is because of this problem of scarce resources and the problem of choice that an economy is pushed to face the central problems. Scarcity of Resources and Problem of Choice: • • No matter, how well a particular economy is endowed with resources, these resources will be relatively scarce to fulfil its unlimited wants. Moreover, these scarce resources have alternative uses and can be allocated to the production of different goods and services. Allocation of resources to any particular use involves a cost in terms of sacrifice of the other possible uses. To allocate the scarce resources in the best possible manner, an economy needs to analyse the cost (i.e. the opportunity cost) of allocating the resources to one use while sacrificing the other uses. For example, a piece of land can be used in a number of ways such as to grow crops, for building houses, for putting up industries, etc. Therefore, the question here arises that to which particular use the piece of land should be allocated. It depends on the economy to analyse what is presently more important (or need as per the present scenario) and which use of land will be most bene ...
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