An economy is a framework within which the economic activities like production, consumption and distribution takes place. Or it is a system which provides people to work and earn their living.
It studies the whole collection of production units operating in a framework or region by which people of that area get their living. Or it is a social science which studies a way a society choses to set its limited resources which have to produce alternative goods and services and to distribute them among different group of people.
POSITIVE AND NORMATIVE ECONOMICS
Under positive Analysis, economies make statements which is concerned with what is, what will be. They tell facts about the universe in which we live. Following are the eg.
- Deficit financing will cause inflation.
- Demand for cars will rise if the prices reduces.
- The income of the agriculture sector falls, if there is a bumper crop.
Under Normative Analysis, economics makes a statement which are about what ought to be. It depends upon people’s judgment about what ought to be. It depends upon people’s judgment about what is good or bad. Examples are
- Deficit financing is good for economy
- Excise Duty on cars should be reduced.
- A minimum price should be paid to farmers.
MARKET AND PLANNED ECONOMY
In a market economy, the factors of production are privately owned and the primary motive of undertaking production is to earn profit. The government plays a minimum role in this economy.
In the planned economy factors of production are owned by a government and welfare of the people is the prime concern. The government is actively involved in such economy.
DISTINCTION BETWEEN MARKET AND PLANNED
|Market Economy||Planned Economy|
|1. Owner of factor||Factors of production are privately owned||Factors of production are publically owned|
|2. Allocation of Resources||Resources are allocated through market mechanism i.e. forces of demand & supply||Allocation of resources is done through planning in the economy.|
|3. Price of the commodities||It is determined and controlled through forces of demand and supply||It is determined and controlled by government|
|4. Objective||Profit maximizing is the main objective||Overall welfare of the society is the main objective|
|5. Role of gout||Government has a minimum role||Very high level of government control|
Microeconomics is the study of particular firm, particular household, individual price wages, income, industry and particular commodity. Micro economics is concerned with the determination of the related prices of the goods and factors of production. That is why, it is also know as price theory.
Micro economics also studies how the output is shared or distributed among different factors of production, who co-operate in the production.
People find their money income limited in comparison to their wants which are unlimited. Hence one has to choose among the set of wants which are unlimited to be satisfied from limited resources.
The problem of choice is the economic problem. The economic problem is the result of scarcity of the resources in relation to the unlimited wants.
For an economy, the economic problem is the problem of resource allocation.
CAUSES OF ECONOMIC PROBLEM
- Unlimited Wants (Ends)
Human wants are unlimited.When particular wants is satisfied, other crop up and this goes endlessly. Human wants are increasing day by day with the development of education, knowledge and civilization.
- Limited Means (Resources)
Resources (Means) refers to all those things that have value for man. They can be categorized as – Natural and human resources and scarcity means resource to produce the goods and services are less in relation to their demand.Due to the scarcity, an economy cannot produce all the goods and services as required by the citizens.
- Means have Alternative Uses
Means are not only limited but also have alternative uses. For e.g. electricity can be used fear lighting lamps, T.V. and refrigerator and many other uses.
It can be concluded that scarcity of resources having alternative uses in relation to the unlimited human wants gives rise to an economic problems.
CENTRAL (BASIC) PROBLEMS OF AN ECONOMY
Every economy has to face the problem relating to choice which are known as central or the basic problem.
- Problem of Allocation of Resources
Economy has to allocate the available resources in the production of different goods and services. While allocating the resources following decisions have been taken.
(A) What to produce :Since, the resources are limited, every economy has to decide what commodities has to be produced and in what quantities. Economy has to make choice between necessity and luxury goods, consumer goods and capital goods and civil goods and military goods.
The problem is what combinations of goods and services to be produced.
The problem before farmer is that on a give piece of land, whether to grow wheat or to grow rice. Or production of more sugar is possible only by reducing the production of other good. This problem has two aspects.
(a) what possible commodities to produces. (b) how much to produce it.
(B) How to Produce :This relates to the techniques of production to be employed while producing goods and services – (a) Labour intensive technique (b) Capital intensive technique. Economy has to decide about the techniques of production on the basis of the cost of production.
Capital intensive technique uses more of capital and less of labour.Labour intensive technique uses less of capital andmore of labourselection of technique is made with a view to achieve the objective of raising the standard of living and to provide employment to everyone. Factors of production are combined in such a manner that maximum output is produced at minimum cost. This problem is also know as “Problem of Choice of Technique”.
The problem before Government of any country is to decide whether to employ more of capital or labour for producing goods and services. Textile can be produced either with more of labour and less of capital or with less labour and more capital. Availability of factors and their relative prices help in determining the technique to be used.
(C) For Whom to Produce (Problem of Distribution) :Goods and services in an economy are produced for those who can purchase them and purchasing power in turn depends on the distribution of the income. So this is the problem of distribution. The produced goods and service are distributed in an efficient manner so that different members of the society gets the maximum satisfaction. This problem relates to the selection of the category of the people who will ultimately consume the goods i.e. whether to produce the goods for more poor or more rich or less poor or less rich.
- Problem of Full and Efficient Utilization of Resources
Resources are scarce and cannot be used to all types of goods needed in an economy. Therefore one cannot afford unemployment or under employment of the scarce resources. Therefore one of the problem which every economy would like to tackles is to make full utilization of the resources.
- Problem of Economic Growth
Since resources are scarce and extinguishes on usage, the another problem faced by economy is the growth of the resources to make up their deficiency.
The problem of economic growth has following 3 aspects.
(1) Expansion of economy’s productive capacity by exploring growth potentialities.
(2) Identification of the factors that either promote or retard growth
(3) Improving technology to raise the level of production.
The opportunity cost of any good is the next best alternative good that is sacrificed. Since opportunity cost is the cost of next best forgone alternative. It is also known as alternate cost.
A farmer can grow, either 100 kg of wheat or 250 kg. of rice on a piece of land. If a farmer chooses to grow 100 kg of wheat, the next best alternative he has forgone is 250 kg of rice. So the opportunity. Cost of growing 100 kg of wheat is 250 kg. of rice.
Marginal Rate of Transformation
It is defined as the rate at which, a producers is willing to sacrifice some units of one commodity in order to produce, one additional unit of other commodity.
It is he slope of PPC
MARGINAL OPPORTUNITY COST
It refers to the number of units of commodity sacrificed to gain additional unit of another commodity.
SHAPE OF PPC WHEN
(A) MRT is Rising or Increasing
When MOC is increasing, PPC will be Concave to the origin. It implies that the rate of sacrifice is increasing at each level.
(B) MRT is Constant
When MRT is constant, it implies that, every time, the producer is willing to sacrifice same, units of one commodity to produce additional unit of another commodity. It also means that all the resources are equally efficient in the production of all the goods. PPC will be a straight line.
PRODUCTION POSSIBILITY CURVE (PPC)
Production possibility curve is a curve which shows all the possible combination of the two goods that can be produced by making full use of given resources and technology in an economy.
It is to be remembered that increases in the production of one commodity would reduce the production of other commodity because resources are limited.
Production Possibility Schedule
It records the various combinations of the two goods that can be produced with the fixed resources assuming the resources are fully and efficiently employed.
(a) The amount of production resource is fixed
(b) There is no change in technology
(c) All the productive resources are fully employed
(d) All the resources are not equally efficient in the production of all
- It slopes downward from left to right
PPC slopes downward in the right direction indicating economy has to sacrifice some quantity of one commodity to have more quantity of other commodity because resources are limited.
- It is concave to the point of origin
PPC is concave to the origin because of increasing opportunity cost. It means more and more sacrifice of one commodity to produce another commodity.. The reason of the increasing opportunity cost is that the resources are not equally efficient in the production of all goods.
It means that resources which are efficient in the production of Y are comparatively less efficient in the production of X. Productivity and efficiency of the factors decreases as they are shifted from one place to another.
CENTRAL PROBLEMS AND PRODUCTION POSSIBILITY CURVE
- Problem of What to Produce
With the given resources and technology any combination of the goods that lies anywhere on PPC can be produced. If the society choose the combination A, B it implies it produces more of wheat and less of cloth and if it chooses E and F, it prefers to produce more of cloth and less of wheat. Fig.(1).
- Problem of Scarcity
This problem can be seen by all those combination of two goods that lie outside the PPC. (Fig. 2)
- Problem of Full and Efficient Utilization of Resources
If all the resources are fully and efficiently utilized the production will take place some-where on the production possibility curve. But if the economy is producing at any combination lying inside the PPC like K, it implies that either some of the resources are lying idle or some of the resource are not used efficiently.
- Problem of Growth
An economy can increase the production by growing resources. This can be shown when PPC moves towards right side. When the economy make advancement in the technology, PPC will shift to the right and it shows the possibility of producing both the goods in more quantities.
Fig. 3 Fig. 4
If the advancement in technology is only in the production of one commodity, than there will not be any increase in the production of other commodity. It will lead to rotation of PPC (Fig. 4).
When resources get destroyed, the production potential of the country decreases and the PP frontier shifts downwards (leftwards).(Fig. 5).
Multiple Choice Questions (1 Mark)
- PPC is also known as
(a) Production possibility frontier (b) Production possibility boundary
(c) Transformation curve (d) All of the above
- Slope of PPC is
(a) MRS (b) MRT
(c) MRE (d) All the above
- Point inside the PPC indicates
(a) Scarcity of resources (b) Growth of resources
(c) Under utilization of resources (d) none of the above
- Economic problem is the
(a) Problem of what to produce (b) Problem of how to produce
(c) Problem of choice (d) None of the above
- Movement from one point to another on PPC indicates
(a) Usage of resources
(b) Increase in the production of both the commodities
(c) Increase in the production of one and decrease in the production of another
(d) None of these
- PPC can be a straight line when
(a) MRT is falling (b) MRT is rising
(c) MRT is constant (d) None of these
- Destroying of resources leads to
(a) Shift in PPC towards right (b) Shift in PPC towards left
(c) No effect on PPC (d) Movement on PPC
- Point on PPC indicates
(a) Full utilization of resources (b) Under utilization of resources
(c) Scarcity of resources (d) Growth of resources
- PPC is downward sloping because
(a) Resources are limited (b) Resources are unlimited
(c) Wants are unlimited (d) All of these
- “For whom to produces” is also known as
(a) Problem of distribution (b) Problem of choice of techniques
(c) Problems of underutilization of resources
(d) All of these
Very Short Answer Questions (1 Marks)
- Define scarcity
- What is the basic problem of an economy?
- How production can be increased in an economy? (tellany one way).
- What does rightward shift in PPC indicates?
- What does leftward shift in PPC indicate?
- What is economics?
- Why do we need to study economics?
- What points should be chosen on the PPC for production?
- What does the movement from the point inside the PPC to the point on the PPC indicates?
- What does falling MRT shows?
- What does rotation of PPC shows?
- Why PPC is concave to the origin?
- Which assumption of PPC is responsible for concave shape of PPC?
- How does updation in technology affects PPC?
Short Answer Questions (3/4 Marks)
- Explain the central problems of an economy?
- Explain the problem of “what to produce” with the help of diagram?
- What is opportunity cost? Explain with the help of numerical example.
- With the help of suitable example explain the problem of “for who to produce”?
- Production in an economy is below the potential due to unemployment. Government started employment generation scheme. Explain its effect using production possibility curve?
- Define production possibility curve and explain its properties?
- Economics slowdown in some part of the world has adversely affected the demand for exports. What will be the effect on production possibility frontier of India?
- How production possibility curve is affected when resources are inefficiently employed in the economy?
- New technology entering the Indian territory due to friendly relations with Japanese Government. How it will affect the PPC of India?
- Give the various reasons of shift in production possibility curve?
Long Answer Questions (6 Marks)
- Calculate marginal opportunity cost (MOC) for commodity X
What can you say about the shape of PPC?
- Explain various central problems with the help of PPC?
- What will be the shape of PPC in the following cases
(a) MRT is falling
(b) MRT is rising
(c) MRT is constant