Economics: Scarcity and Resource Allocation

Economics Fundamentals

• Economics involves people working for money.
• Economics studies how society manages limited resources to satisfy unlimited wants.
• Scarcity arises because resources are limited while human wants are unlimited.

Economic Problems

• The core economic problem is how to allocate scarce resources among competing uses.
• Unlimited wants and limited resources lead to the problem of scarcity.
• Resources have alternative uses, complicating allocation decisions.
• An example of unlimited wants is presented as multiple uses of milk, like tea, coffee, buttermilk, curd, and paneer.
• Problem exists because there are many different uses for the same resources.

Central Problems of an Economy

• The central problems relate to deciding what, how, and for whom to produce.
• What to produce involves deciding which goods and services to produce from available resources.
• How to produce involves choosing between labor-intensive and capital-intensive techniques.
• For whom to produce involves deciding the distribution of output among individuals (rich or poor).

Opportunity Cost

• Opportunity cost is the value of the next best alternative forgone when making a decision.
• For example, choosing to eat instead of watching a movie means the enjoyment from the movie is the opportunity cost.

Production Possibility Curve (PPC) Overview

• The PPC illustrates the maximum attainable combinations of two goods an economy can produce with given resources and technology.
• Other names related to the PPC are Production Possibility Frontier, Transformation curve and Transformation Boundary.
• The PPC is a graphical representation of the combination of quantities of two goods.

PPC Assumptions

• Fixed resources: The total quantity of resources available for production is fixed.
• Two goods: Only two goods are considered for production.
• Full utilization: Resources are fully and efficiently utilized.
• Constant technology: The technology of production remains unchanged.

PPC Schedule and MRT

• A PPC schedule shows various combinations of two goods that can be produced with given resources.
• An example is outlined using guns versus butter production, highlighting tradeoffs.
• MRT (Marginal Rate of Transformation) is the number of units of a commodity sacrificed to gain an additional unit of another commodity.
• MRT formula measures how many units of one product needed to be given up to produce one unit of another.
• MRT = (Amount of sacrifice) / (Amount of gain)

PPC Graph and Concepts

• The PPC is typically concave to the origin due to the increasing opportunity cost.
• Attainable points are those inside or on the PPC, representing feasible production levels.
• Unattainable points lie outside the PPC, representing production levels beyond current resources.
• Attainable point means you have enough of the resource, and the Unattainable point means that you do not have enough resources.

PPC Shape Determinants

• PPC slopes downward because of the inverse relationship between the production of two goods: more of one requires less of the other.
• If MRT is increasing, then the PPC is concave.
• Concave PPC means that MRT is increasing.

Shift in PPC

• A shift in the PPC occurs when there is a change in the total amount of resources or technology, affecting the production of both goods.
• A rightward shift indicates economic growth and increased production capacity for both product one and product two.
• When PPC shifts to the right, there is growth in product one and product two.

Rotation in PPC

The PPC curve rotates if only Product One increases, and Product Two stays the same, or vice versa.

• Rotation in the PPC occurs when only one product can increase production through technology or increased resources.
• It shows the growth or decline in the capacity to make just one of the two products.
• If steel drops from 1kg to 500g, less guns are produced. If steel increases from 1kg to 2kg, more guns are produced.

Positive vs. Normative Economics

• Positive economics deals with facts and describes "what is," focusing on actual conditions and data.
• Positive economics does not pass judgement.
• Normative economics involves value judgments and suggests "what ought to be," discussing ideal situations.
• Normative economics does pass judgement.

Micro vs. Macro Economics

• Microeconomics studies individual economic units, like consumer and price and are related to Price Theory.
• Macroeconomics studies the economy as a whole, including inflation, unemployment and are related to Income and Employment Theory.