Grade 12 Economics Teachers' Guide PDF

Economics Teachers' Guide Grade 12 (Implemented from 2017) Department of Commerce Faculty of Science and Technology National Institute of Education Maharagama web : www.nie.lk Email : info@ nie.lk Economics Teachers' Guide Grade 12 Department of...

Economics Teachers' Guide Grade 12 (Implemented from 2017) Department of Commerce Faculty of Science and Technology National Institute of Education Maharagama web : www.nie.lk Email : info@ nie.lk Economics Teachers' Guide Grade 12 Department of Commerce Faculty of Science and Technology National Institute of Education Maharagama Economics Grade 12 - Teachers' Guide  National Institute of Education First Print - 2017 ISBN : Department of Commerce Faculty of Science and Technology National Institute of Education Printed By ( i  Content Page Message from the Director General iii Message from the Deputy Director General iv Curriculum Committee v-viii Learning Outcomes and Model Activities 1-276 ii Message from the Director General … With the primary objective of realizing the National Educational Goals recommended by the National Education Commission, the then prevalent content based curriculum was modernized, and the first phase of the new competency based curriculum was introduced to the eight year curriculum cycle of the primary and secondary education in Sri Lanka in the year 2007 The second phase of the curriculum cycle thus initiated was introduced to the education system in the year 2015 as a result of a curriculum rationalization process based on research findings and various proposals made by stake holders. Within this rationalization process the concepts of vertical and horizontal integration have been employed in order to build up competencies of students, from foundation level to higher levels, and to avoid repetition of subject content in various subjects respectively and furthermore, to develop a curriculum that is implementable and student friendly. The new Teachers’ Guides have been introduced with the aim of providing the teachers with necessary guidance for planning lessons, engaging students effectively in the learning teaching process, and to make Teachers’ Guides will help teachers to be more effective within the classroom. Further, the present Teachers’ Guides have given the necessary freedom for the teachers to select quality inputs and activities in order to improve student competencies. Since the Teachers’ Guides do not place greater emphasis on the subject content prescribed for the relevant grades, it is very much necessary to use these guides along with the text books compiled by the Educational Publications Department if, Guides are to be made more effective. The primary objective of this rationalized new curriculum, the new Teachers’ Guides, and the new prescribed texts is to transform the student population into a human resource replete with the skills and competencies required for the world of work, through embarking upon a pattern of education which is more student centered and activity based. I wish to make use of this opportunity to thank and express my appreciation to the members of the Council and the Academic Affairs Board of the NIE the resource persons who contributed to the compiling of these Teachers’ Guides and other parties for their dedication in this matter. Dr. (Mrs.) Jayanthi Gunasekara Director General National Institute of Education iii  Message from the Deputy Director General Education from the past has been constantly changing and forging forward. In recent years, these changes have become quite rapid. The Past two decades have witnessed a high surge in teaching methodologies as well as in the use of technological tools and in the field of knowledge creation. Accordingly, the National Institute of Education is in the process of taking appropriate and timely steps with regard to the education reforms of 2015. It is with immense pleasure that this Teachers’ Guide where the new curriculum has been planned based on a thorough study of the changes that have taken place in the global context adopted in terms of local needs based on a student-centered learning-teaching approach, is presented to you teachers who serve as the pilots of the schools system. An instructional manual of this nature is provided to you with the confidence that, you will be able to make a greater contribution using this. There is no doubt whatsoever that this Teachers’ Guide will provide substantial support in the classroom teaching-learning process at the same time. Furthermore the teacher will have a better control of the classroom with a constructive approach in selecting modern resource materials and following the guide lines given in this book. I trust that through the careful study of this Teachers' Guide provided to you, you will act with commitment in the generation of a greatly creative set of students capable of helping Sri Lanka move socially as well as economically forward. This Teachers’ Guide is the outcome of the expertise and unflagging commitment of a team of subject teachers and academics in the field Education. While expressing my sincere appreciation for this task performed for the development of the education system, my heartfelt thanks go to all of you who contributed your knowledge and skills in making this document such a landmark in the field. M.F.S.P. Jayawardhana Deputy Director General Faculty of Science and Technology iv Guidance and Approval - Academic Affairs Board National Institute of Education Subject Coordinator Mr. D.L.C.R.Ajith Kumara Lecturer, National Institute of Education Curriculum Committee Mrs.P.H.Kusumawathi Director, Department of Commerce, National Institute of Education. Mr.K.R.Pathmasiri Director, Department of Mathematics, National Institute of Education. Mr. D.L.C.R.Ajith Kumara Lecturer, Department of Commerce, National Institute of Education Eminent Prof.D.Attapattu Department of Economics, University of Ruhuna. Prof.E.Dayarathne Department of Commerce, University of Sri Jayawardenepura. Prof.Prasanna Perera Department of Economics University of Peradeniya. Dr. M.Ganeshamoorthi Department of Economics University of Colombo. Mrs.Kamani Perera Director, Department of Commerce Ministry of Education. Mrs.L.Ajantha Vithara Retired Deputy Principal, Gothami BMV, Colombo. Mr.I.P.S.Padmini SLTS I, St.Joseph BMV Kegalle. Mr. W.Lional SLTS I, Vishaka BMV Colombo- 10 Mrs.Amara Wijewardena SLTSI, Teacher traing center, Thabuththegama Mr.B.S.Thilakarathne SLTS I, Sawrnamalee BMV, Kandy. Mrs.Hazeena Musadil SLTS I, Holly family convent, Bambalapitiya.. v Curriculum Committee Mrs.P.H.Kusumawathi Director, Department of Commerce, National Institute of Education Mrs.M.A.I.P.Perera Senior Lecturer Department of Commerce National Institute of Education Mr. Prabaharan Lecturer Department of Commerce National Institute of Education Mr. D.L.C.R.Ajith Kumara Lecturer, Department of Commerce, National Institute of Education Mr. Ananda Maddumage Lecturer Department of Commerce National Institute of Education Mr.S.R.Rathnajeewa Assistant Lecturer Department of Commerce National Institute of Education Prof(Mrs.) K.U.A.Thennakoon Department of Economics University of Kelaniya. Dr. B.M. Sumanarathne Department of Economics University of Ruhuna. Mrs.A.M.F. Madaniya Deputy Director, Deapartment of education Southern province. Mr. K.P.Karunarathne SLTS I, Wijaba National college Hungama. Mrs. L.D.T. Nishani SLTS I, Gothamee BMV, Colombo. Mrs. M. G.. J. Pavithranee SLTS I, Siromawoo Bandaranayake BMV, Colombo. vi Writing Panel ( Mrs.L.Ajantha Vithara Retired Deputy Principal, Gothami BMV, Colombo. Mr. E.A.M K Ekanayake Satatition, Department of census Mr. A. Weerathunga Satatition, Department of census Mr. W.Lional SLTS I, Vishaka BMV Colombo- 10 Mr.I.P.S.Padmini SLTS I, St.Joseph BMV Kegalle. Mrs.Amara Wijewardena SLTSI, Teacher traing center, Thabuththegama Mr.B.S.Thilakarathne SLTS I, Sawrnamalee BMV, Kandy. Mrs.A.M.F. Madaniya Deputy Director, Deaprtment of education Southern province. Mr. K.P.Karunarathne SLTS I, Wijaba National college Hungama. Mrs. L.D.T. Nishani SLTS II, Gothamee BMV, Colombo. Mrs. M. G.. J. Pavithranee SLTS II, Siromawoo Bandaranayake BMV, Colombo. Mrs.P.R.S Rajasinghe Deputy Principal, Polegoda M.V Horana. Mrs.Hazeena Musadil SLTS I, Holly family convent, Bambalapitiya.. Mr. P.L.A. Nandasena SLTS I, Southland BMV, Galle. Mrs. P.D. Dammika SLTS II, Polegoda M.V Horana. Mr. A.M.Aleem SLTS II, Ranabima National College vii Editors Panel : Eminent Prof.D.Attapattu Department of Economics, University of Ruhuna. Prof.E.Dayarathne Department of Commerce, University of Sri Jayawardenepura. Mr. D.L.C.R.Ajith Kumara Lectuer, Department of Commerce, National Institute of Education Mrs.M.A.I.P.Perera Senior Lecturer Department of Commerce National Institute of Education Mr.S.R.Rathnajeewa Assistant Lecturer Department of Commerce National Institute of Education Translating to English : Mrs. M. G.. J. Pavithranee SLTS II, Siromawoo Bandaranayake BMV, Colombo. Mrs. L.D.T. Nishani SLTS II, Gothamee BMV, Colombo. viii Instructions of Referring to the Teachers Instructional Manual (Teachers Guide) The Economics syllabus for General Certificate of Education (Advanced Level) is implemented from 2017 onwards after being revised under the national curriculum revising policy which is implemented once in every eight years. The Economics which was introduced as an Advanced Level subject in 1997 was undergone to the first revision on competency based in 2009 has been orderly listed out under 12 competencies for both grade 12 and grade 13 in this manual. A practical teaching-leaning process that can be implemented in the classroom for 42 competency levels from the first competency in grade 12 syllabus has been proposed in this manual. This teacher instruction manual has been complied all the competency levels prescribed for grade 12 in Economics syllabus of General Certificate of Education (Advanced Level). The relevant competency, competency levels, the number of periods allocated for the competency level, the learning outcomes expected to have been achieved at the end of learning the subject matters under the competency level, are contained first and then proposed instructions for lesson planning, followed by a guideline to explain the subject matters are also contained in this manual in great details. Proposed activities for assessment and evaluation are also associated with many competency levels at the end. The classroom teacher-learning process is expected to be planned in a manner of Economics will be developed parallel to the growth of attitudes, skills and practices of the students. An adequate guidance is expected to be gained for that purpose through this Teacher Instruction Manual. Every teacher should lead the students for practical learning through planning the lessons for classroom teacher – learning process with reference to the proposed benchmarks under instructions for lesson planning and the detailed facts contained in the guidelines to explain the subject matters. Since Economics is a practically important subject, the lesson plans are expected to be prepared by the teachers expanding the boundaries of the scope of their comprehension, reviewing the updated subject matters simultaneous to the prospective changes that may possibly take place in the business field. ix Learning Outcomes and Model Activities Competency 01 : Comparatively analyses basic economic problems and the alternative ways of solving the basic economic problems in an economic system. Competency level 1.1 : Investigates the subject field of Economics. Number of periods : 06 Expected Learning Outcomes : Describes economic behaviour of people Confirms economics as a social science. Explains the importance of learning Economics. Explains the difference between microeconomics and macroeconomics with examples. Explains the difference between positive and normative statements with examples. Instructions for Lesson Planning:  Inquires from students about the subjects they followed for G.C.E O/L and the difference of science and civics from other subjects.  Conduct a discussion highlighting the facts mentioned below;  The subject of science studied phenomenon of natural environment and the study carried out through the conclusions derived by the tests done at laboratories.  The subject of civics study about the things needed to live as a good citizen the study carried and out through the conclusions derived by the study done at observing behavior of people at a society from various aspects.  In this way studying behavior of people of a society from various aspects is done by social sciences.  Diverse human behavior or facets of human society is studied under social sciences.  Economic facets of the human behavior is studied under economics. 1   Since economic behavior of people within the society is studied under Economics it is called a social science.  Group students appropriately and involve them in the following activity Proposed Instructions for Learning:  Pay attention to the place received by your group from the two places given below.  A religious place  A bakery  Name the parties present at your place.  Explain the activities performed by them.  Explain their main objective and the need.  Compare the differences between parties at your place and the parties at the other place.  Prepare to present your findings to the whole class creatively and collectively. A Guidelines to Explain the Subject Matters:  People of a society have various needs and these needs can be classified as a physical and as mental needs.  The needs that can be directly fulfilled by the consumption of goods and services are called physical needs. Example: Foods, shelter, cloth  There are mental needs that cannot be directly fulfilled by the consumption of goods and services Example : spiritual development love, kindness  The activities and behaviours performed by people to fulfill physical needs and wants of a society using limited resources are called economic behaviour. 2 Example: Goods and services production, distribution and consumption  People of a society have various behaviours economic studies economics behavior of people.  Since the economic theories and principles emphasized in economics are based on scientific method it is considered as a science.  Main factors which differ economics from other natural sciences are given below.  Economic behaviors of people are examined by economics.  Economic theories developed cannot be proved at laboratories  Theories of social sciences like economics cannot be formed similar to rigid theories formed in natural sciences as economic behaviors are sensitive to factors such as time, region and social environment.  Economic facet studied under economics means the human behaviors relating to production, exchange and consumption.  Economics studies how people behave in solving the struggle between peoples’ unlimited desire to own goods and services and limitedness of resources to produce goods and services.  Economic facet deals with a broader subject area in human society and most of burning issues faced by the man will be an economic nature..  Due to this reason Economics is considered as the queen of social sciences.  Every economic activity considered in economics is related to goods and services production, distribution and consumption.  The subject field of economics studies how society acts towards to fulfill their wants by consuming goods and services and how they make decisions in order to live a better life.  Considering various definitions presented one common definition of economics can be formed as follows, “ The subject which studies the relationship between scarce resources with alternative uses and human wants is called Economics”  This idea can also be presented briefly as follows, “Economics is the science which studies how unlimited human wants are fulfilled through limited resources”  Some examples for the importance of learning economics can be given as below. 3   Important in ruling a country.  Important as a successful citizen.  Ability to understand economic phenomenon well  Important in efficient decision making as investors, consumers and as producers.  Important to vote for a party  Important to make logical decisions for students  Important in selecting a better job  Studying behavior of small units of an economy such as each sector Institutions, persons that consist each sector of an economy and economic variables separately is called microeconomics  Following this analysis the economic behavior of units which make decisions of an economy such as consumers, labourers, production firms and government is done by micro economics.  Some examples for the units that studied under microeconomics are given below  Studying demand supply and prize determination of a good  Production function of a firm  Production cost of a firm  Market operation of each good  consumer behavior at the market  market operation of a production firm  Scarcity  marginal cost  choice made from alternatives  Aggregate functioning of an economy is studied macroeconomics.  Aggregate functioning of an economy takes place by the sum of the small units of each sector, institutions and persons of an economy 4  Therefore functioning of aggregate economic activity, the factors affecting those activities and the problems arising are studied in macroeconomics.  Some examples for the units studied in macroeconomics are given below.  Aggregate output level  Aggregate income level  Economic fluctuations and depressions  Inflation  Employment level  Unemployment level  Investment  Economic Growth  Economic recession  Balance of payments  Exchange rate  Money supply  Exports / Imports  Economics consists of both positive and normative statements.  Statements which answer the questions of what, what happened, what will happen and the statements that can be verified are called positive statements.  which means the statements that state the existing nature of a particular thing, nature existed and from that the statements that state what will definitely happen in future  Correctness of such a statement can be tested with the use of real world facts  If the statement is verified through real world facts it is accepted or if not it is rejected.  It can be seen a scientific and a theoretical nature in most of positive statements.  Most economic theories also explain positive statements.  Positive statements are mostly objective.  Some examples for positive statements are given below 5   Positive relationship exists between money supply and the price level.  Negative relationship exists between price and the quantity demand.  Sri Lanka’s unemployment level in 2013 was 44]  Population growth rate in Sri Lanka is 1]  Positive statements are used to explain economic behaviors and economic phenomenon  Normative statements are the statements presented in relation to what should exit and what should happen in a society.  As normative statements are based on personal views, beliefs and traditions they are mostly subjective.  It is difficult to test correctness of normative statements objectively using real world data.  Some examples for normative statements are given below  It should increase monthly salary of every government worker by Rs.5000  Sri Lanka should obtain foreign aids for development  Every citizen should be given free medical facilities  Every person should earn equal income  Economic growth rate of Sri Lanka should be maintained at 8]  Normative statements are important in economic policy analysis. 6 Competency level 1.2 : Presents the way of fulfilling human needs and wants though the consumption of goods and services. Number of periods : 06 Expected Learning Outcomes :  Explains the difference between human needs and wants with examples.  Explains the difference between economic goods and non-economic goods with examples.  Shows the way of converting non- economic goods to economic goods.  Classifies resources as economic resources and as non-economic resources.  Classifies natural resources as renewable resources and as non-renewable resources with examples. Instructions for lesson planning :  Inquires from students the things needed for people to live.  Provide an opportunity for students to identify what needs are with the answers given by them.  Instruct students to list out the various ways of fulfilling needs.  With the use of above explain the difference between needs and wants with examples.  Group students properly and engage them in the following activity. 7  Proposed Instructions for Learning:  Two categories of goods used to fulfill human needs are mentioned below. Pay attention to the category received by your group.  Sun light, air, rain water, wind  Books, chocolates, buns, shoes  Show what needs are being fulfilled using those goods?  Prepare a list of some other goods and services used to fulfill the same need.  Show how another category of goods received by the other groups differs from the category of goods received by your group.  Show what resources are found to produce these goods?  Prepare to present your findings to the whole class. A Guidelines to Explain the Subject Matters:  Basic necessities needed to sustain human life are called needs Examples: - Food Clothes Housing  The various forms of fulfilling needs are called wants Examples :- Need Rice Food Bread String hoppers Wants Hoppers  While needs are combined with biological sources, wants are combined with traditions, values and culture.  Needs are limited and wants are unlimited.  Although needs do not change with time, wants change with it.  Needs are common to all, wants differ from person to person. 8  Wants can be classified as material wants and as non-material wants (physical wants, mental wants). Economics pays attention only to the material wants that can be fulfilled through the consumption of goods and services.  Human wants are fulfilled with goods.  Anything which provides positive satisfaction or utility is called goods in economics.  Goods that fulfill human needs and wants  Non-economic goods (Free goods/cost free goods/natural goods)  Economic goods  Goods with unlimited supply at zero price are called non-economic goods. Examples :- Air, water and sun light gifted from nature.  There is no resource cost and opportunity cost with non-economic goods.  Goods with scarce supply are called economic goods. Example :-Pens, books, rice, wheat flour  There is a resource cost and opportunity cost involved with economic goods.  Economic goods are produced with the intervention of man and with the combination of resources.  As economic goods are produced with scarce resources it involves a price and also there is a problem of choice.  Although there is no room to convert economic goods to non-economic goods there are situations where non-economic goods can become economic goods. Example:- Oxygen used by a diver when diving Oxygen given to patients Solar panels produced with solar power Bottled water  Oxygen, solar power, water used in the above situations are converted into economic goods and this has happened because it involves resource cost and an opportunity cost.  All inputs used to produce goods and services to fulfill human wants are called resources.  There are two forms of resources 1. Economic resources 2. Non economic resources 9  Resources with a limited supply against unlimited wants of a society or resources which are scarce in nature are called economic resources.  As scarcity is considered the main characteristic of economic resources when consuming opportunity costs arise with these resources. Example:- A used land, fuel  The non scarce resources gifted by nature and which do not involve an opportunity cost are called non economic resources.  Resources gifted from nature used in the production process are called natural resources. Example :- sun light, air, rain water  There are two forms of natural resources. 1. Renewable resources 2. Non-renewable resources  The resources which do not used up with consumption are called renewable resources. These resources are generated again. Example:- forestry, fisheries  The resources which are used up with consumption and the resources which do not generated again are called nonrenewable resources. Example:- Diamonds, gas, gold, coal  As nonrenewable resources depreciate fast these resources may should not be preserved for the future. In addition, sustainable development can be delayed with this. Therefore it is important to protect natural resources.  Due to over consumption of natural resources, it should face for number of problems globally. Examples: Increase of global warming Liquidation of glaziers Damage to the ozone layer Shortage of water Natural disasters such as floods and land slides  To prevent the unfavorable effects of such problems it is essential to protect natural resources. 10 Competency level 1.3: - Analyses determinants of factor productivity with the identification of the characteristics of factors of production. Number of periods: 06 Expected Learning Outcomes : Classifies factors of production used to produce goods and services. Shows the characteristics of factors of production separately. Defines factor productivity. Describes the determinants of factor productivity. Song: - We have some resources But with many uses Duty is to preserve these Land, capital, labour, entrepreneur This is the way to classify them  Presents the song to the class by a student.  Inquiries from the students about the things mentioned.  Develops a discussion raising the following facts.  Production resources are used to produce goods and services.  As the resources are scarce, they should be used economically.  The resources can be classified as land, labour, capital and entrepreneur.  Group students properly and engage them in the following activity. 11  Proposed Instructions for Learning:  From the following production situations pay attention to the situation received by your group.  Making of pots  Making of cane chairs  Making of porridge  Prepare a list of natural resources, human resources and the resources made by man which used in the production situation received by your group.  Show the parties of decision making and risk bearing of the relevant production process.  State the characteristics of natural resources, human resources and the resources made by man used in the production separately.  Show the importance of making decisions and risk bearing of the production process.  Propose the ways to minimize the cost of production of resources and to maximize output.  Present your findings to the whole class creatively and collectively. A Guidelines to Explain the Subject Matters:  The resources of land, labour, capital and entrepreneur used in production are called production resources.  Land and capital can be classified as property resources and labour and entrepreneurship can be classified as human resources.  Natural resources gifted from nature which can be used productivity in production are called land. All resources such as forests, minerals, ocean, rivers, wild animals and air located above or below the earth are included under land.  The Following are the characteristics of land. 1. Being a gift of nature 2. Supply being inelastic 12  3. Immobility 4. Possibility to improve productivity 5. Non uniformity (Location, climate, minerals, aquatic resources) 6. Payment for land being rent.  Mental and physical efforts used to produce goods and services are called labour.  Characteristics of labour are as follows. 1. Being a live factor 2. Mobility 3. Heterogeneity 4. Possibility to improve productivity through education and training 5. Possibility of decision making and organization 6. Payment for labour being wages  Factor affecting the size of the labour force. 1. Size of population and age structure 2. Health of population 3. Level of education and skills of the population  Man made aids used in the process of the production of goods and services are called capital.  Special characteristics of capital are, 1. Being a man made factor 2. Being a real factor 3. Being a stock factor 4. Consists of productivity 5. Possibility to use in production again and again 6. Possibility to depreciate 7. Benefit of capital being interest  Variability of capital and its use is determined by the technology of each country  Various forms of capital are as follows. 1. Fixed capital/real capital/physical capital 2. Circulating capital 13  3. Economic overhead capital 4. Social overhead capital 5. Human capital 6. Natural capital 7. Social capital  Durable capital used in the production process continuously such as factories, machinery and stores are called fixed capital.  Throughout the period where fixed capital is used the resource owner will receive a flow of benefits.  Stock of raw materials used in the production process, stock of semi- finished goods stock of goods being produced, stocks ready for sale and finished goods are identified as circulating capital.  This type of capital important in continuing production process without any barrier and for preparing future production plans.  Capital goods which facilitate production of goods and services and the distribution process of an economy are called economic overhead capital. Also called as economic infrastructure. Examples: Ports, air ports, high ways  Economic infrastructure affects encourage domestic and foreign private investments. Due to this, today. The governments of most countries provide this type of capital.  Capital goods which help produce services to fulfill basic human needs are called social overhead capital. Buildings in the education sector, hospitals in the health sector, operation theatres, medical research centers and equipment and also drainage lines come under social overhead capital. These improve social welfare.  Skills of labour consists of education, training, research, experiences and favourable health which help to improve the productivity of labourers and professionals are called human capital.  Through human capital, productivity of labour can be improved and both quality and quantity of production can be increased.  University lecturers, trained teachers and consultants are the examples for improved labour of human capital 14  Natural resources such as land, streams, air, water and eco systems which facilitate production are called natural capital. Commonness of natural capital would be an important factor for economic growth.  Institutions which improve social interrelations quantitatively and qualitatively, traditions, membership of clubs and social networks are called social capital. Today social capital is a major concern of research and development institutions.  In economics money does not consider as capital.  Capital stock of a country is generated through investment. Investments arise with savings. Therefore, there is a relationship among capital, investment and savings.  Savings of an economy exist in various forms. It can be classified as domestic savings, foreign savings, business firms’ savings and public savings.  The proportion of house hold income not used for daily consumption is considered as savings.  Part of firms’ profits is kept in firms as retained profits. It is called business savings and it will be used for future investment.  The balance obtained by deducting current expenditure from total government revenue is identified as public savings.  Combining all factors of production within an economy, organizing of production activities, operation and policy making while bearing risks is called entrepreneurship.  Functions performed by an entrepreneur are as follows. 1. Mobilizing factors of production engaged in policy decision making. 2. Organization of production activities 3. Introduction of innovations 4. Risk bearing  Characteristics of an entrepreneur are, 1. Being a human factor 2. Being a generating force 3. Successfully facing challenges 15  4. Leadership quality 5. Future vision 6. Belief in self 7. Room for training 8. Creativity 9. Identifying of opportunities 10. Positive thinking 11. Flexibility  There are differences between a manager and an entrepreneur. A manager is the person who implements decisions made by an entrepreneur. Although the benefit gained by an entrepreneur is considered as profit earnings of a manager is considered as wages. An entrepreneur faces uninsured risks while a manager does not face such risks.  Countries like Australia and New Zealand have lot of land resources. Therefore mainly they use land in their production.  Countries like China and India use mainly labour in their production as these countries have world’s largest population.  Countries like the United States of America and Japan use capital mainly in their production as these countries are rich with capital.  Although there is less of land, labour and capital Singapore has achieved a high level of development with having the factor of entrepreneurship.  Average output obtained by a unit of an input is called productivity.  Factor productivity is estimated as Factor productivity = Total output Total input  Determinants of factor productivity are  Technology  Human capital  Management  Division of labour and specialization 16 Competency level 1.4 : Analyses the central problem of economics, logically. Number of periods :06 Expected Learning Outcomes: Defines the concept of scarcity. Provides reasons for scarcity. List alternative uses of resources and explains the way of making choices with examples. Defines the concept of opportunity cost. Analyzes the concept of opportunity cost with examples. Analyses the situations of zero opportunity cost with examples. Instructions for lesson planning : Select two students to present the dialogue given below. Son : “Mother my pair of shoes is badly damaged, please buy me a pair of shoes. Mother : “Let me see, this can be used for a few more days by getting mended. The money I have is not enough to last till next week. There is one more week for your father to get his salary. Son : My school bag also unfastens, so it is difficult to carry books in it. At the same time my Mathematics book is also over now. Mother : The Book is essential; therefore we will buy a book and we will try to buy a bag the next month.  Inquire from the students; the facts emerging from the dialogue.  Conduct a discussion by highlighting the facts mentioned below.  Resources are limited and wants are unlimited. When trying to fulfill unlimited wants using limited resources the problem of scarcity arises.  Inadequacy of resources at a particular time to fulfill wants of people of a society is called scarcity in economics. 17   Make the students engage in the activity by appropriately grouping and providing proposed learning instructions. Proposed Instructions for Learning:  Focus your attention to the resource you have received from the resources given below:  Money deposited at a bank  Piece of land of an acre  A building closer to the main city  Identify the main characteristics of the resource you have received. Lists out its alternative uses  Arrange them in order while considering their alternative uses  Out of the above, present the best alternative opportunity that your group has selected  Due to that selection, point out the next best alternative opportunity what you have given up. A Guidelines to Explain the Subject Matters:  Scarcity is the central economic problem common to every economy.  It is a relative concept(which means compared to human wants resources are relatively limited).  This does not mean the total absence of resources (Relative search).  The problem of scarcity arises with the existence of two main characteristics of a society they are as follows 1. At a given period of time human wants being unlimited. 18  2. At a given period of time resources used to produce goods and services to fulfil human wants being limited.  The shortage of goods prevailing at the market is not considered as scarcity as the shortage arises with the delay of stocks and this shortage disappears with the arrival of stocks.  The goods produced with scarce resources are called economic goods and the supply of these goods are limited.  Use of resources economically is considered as efficient utilization of resources. However until wants remain unlimited, this economic use of resources would not solve the problem of scarcity.  Scarcity is considered as the central problem of economics due to the following reasons, 1. It is common to every society. 2. As any society would commonly face the problems of what to produce in what quantity, how to produce and whom to produce.  Since scarce resources have alternative uses, instead of selecting many, people have to choose one alternative. For Example- when considering land it has alternative uses such as constructing of factories, farming and making of play grounds, therefore a decision has to be made in selecting one alternative.  In this regard it has to be subjectively ordered which wants should be fulfilled first and which wants are expected to be fulfilled later.  Choices are made by households, business firms and the government in various ways.  The problem of choice arises in an economic system due to 1. Scarcity of resources 2. Based on alternative uses of resources  In this way when selecting one alternative from all other alternatives available, the value of the next best alternative forgone is called opportunity cost.  Opportunity cost is also named as real cost and as economic cost. For example the alternatives for land available to a person in the above example can be stated as follows according to its priority. 1. Constructing of a factory 19  2. Farming 3. Building of a play ground  When selecting the alternative of constructing of a factory the next best alternative forgone would be the alternative of farming and therefore the opportunity cost of constructing a factory is the harvest that can be obtained by farming.  Opportunity cost is considered as a positive concept and opportunity cost is positive only with economic goods.  Important factors relating to the opportunity cost of a choice are as follows, 1. The concept of opportunity cost is not a financial concept. It is a real concept, which means the opportunity cost concept shows the real value of the next best alternative forgone when selecting an alternative. It is not the financial value. 2. Opportunity cost concept is connected to the individual. Therefore opportunity cost can be expressed only by the person who made the choice. It differs from person to person. 3. There is an external cost which occurs with opportunity cost.  There are a few situations where opportunity cost can be zero. 1. When there are unlimited resources(Existence of non-economic goods) 2. Absence of alternative uses. 3. When there are unemployed resources. 20 Competency level 1.5 : Inquires the Basic Economic Problems. Number of periods : 04 Expected Learning Outcomes: Names the Basic Economic Problems. Analyses the Basic Economic Problem such as what to produce in what quantity. Analyses the Basic Economic Problem of how to produce. Analyses the Basic Economic Problem of whom to produce. Instructions for lesson planning :  Inquire from students whether the problem of food and housing are common problems faced by every person in the world or not.  Conduct a discussion highlighting the facts mentioned below.  Although food problem and housing problem are the problems faced by some countries of the world they are not common problems faced by every person in the world.  While scarcity being common to any society, each society commonly faces the problems of allocation of resources among alternative uses as alternative uses involve with resources.  Make the students engage in the activity by appropriately grouping and providing proposed instructions for learning. 21 Proposed Instructions for Learning :  Students in your class received an opportunity to produce and sell a particular food item for their Economics day  Group students into two groups as 1. Group A 2. Group B  The Economics society decided to give Rs. 10000 for each group.  One group should produce one food item.  Pay attention to the group you belong and by discussing with the other groups try to solve the following problems.  Prepare a list of food items that can be produced with money given to you.  Decide the food item to be produced by a group discussion.  How much of that food item will you decide to produce?  What factors should be considered when deciding the type of food and its quantity?  When producing that food item what type of production technique will be used by your group?  What reasons affected that production technique?  To whom is in this product produced?  Prepare to present your findings to the whole class in a creative manner 22 A Guidelines to Explain the Subject Matters:  Due to the scarcity of resources and with its alternative uses any society should make three choices  These three choices are common to any society  These three choices are identified as basic economic problems in economics.  In this regard basic economic problems means, 1. What to produce in what quantity? 2. How to produce? 3. For whom to produce?  Due to the scarcity of resources and alternative uses any society would face the basic economic problem of what to produce in what quantity? Examples:- Using scarce resources, it has to be decided which goods to be produced? Whether to construct hospitals or schools Whether to construct factories or playgrounds Whether to produce consumer goods or capital goods  Similarly it should decide the quantity of the selected goods to be produced Examples:- How many hospitals? How many factories? How much of capital goods?  In this way the resources should be allocated after deciding what goods to be produced and in what quantity  Also when producing the decided goods in the decided quantity it should be decided how much of resources should be used for the present and how much left for the future. ( which means it has to be decided from available resources how much is used at the present and how much is kept for the future)  As the resources are distributed after deciding what to be produced in what quantity, this basic economic problem is also identified as a resource allocation problem. 23  Due to the scarcity of resources and alternative uses any society would face the problem of how to produce as well.  The basic economic problem of “How to produce?” means which production technique should be used in producing goods and services?  Also it is the idea which resources are to be used in which proportion  Two production techniques can be used to produce goods and services as labour intensive production technique and capital intensive production technique.  Labour intensive production techniques use more of labour and relatively less capital and capital intensive production techniques use more of capital and less of labour.  As the production has to be carried out with the use of any production technique, the basic economic problem of how to produce is also identified as a problem of production.  The problem of whom to produce means among whom the total product of the economy is to be distributed.  Which means who own the limited amount of goods and services produced with the use of scarce resources.  The use of goods depends upon a person’s income.  Factor owners earn income in the form of wages, rent, interest and profits.  The income gained by each person differs on factor ownership and at factor price.  The person who own more factor income will have the chance of consuming more goods produced and the person who owns less factor income will have the less chance of consuming the goods produced.  In this way the consumption of goods depends upon a person’s income the problem of the whom to produce is also identified as a problem of distribution. 24  Competency level 1.6 : Analyses the ways of organizing to solve basic economic problems. Number of periods: 04 Expected Learning Outcomes : Defines economic systems. Explains the elements of an economic systems. Names main actors of an economic systems. Inquires the duty of decision making parties of an economic systems. A Guidelines to Explain the Subject Matters:  Mechanism or the institutional framework made by people who live within a society to solve basic economic problems is called an economic system or an economic organization.  Institutions of an economic system operate according to the rules and regulations made by man.  As these institutions consist of men they are live and active.  Similar to the natural elements of a physical system, economic institutions are the elements of an economic system.  These economic institutions are also called as institutional characteristics.  Various forms of institutional patterns can be seen in an economy depending upon social, cultural and ancient patterns prevailing at each country.  Although there are some differences the main elements of an economic system are as follows.  Households  Government  Business firms  Labour organizations  Non governmental organizations  Markets  Incentives 25   Legal structure  Values, traditions and culture  From these main elements special parties who make decisions in an economic systems are the households, government, business firms, labour organizations and the non-governmental organizations.  The most important institutional characteristic of an economic system is the household.  A group of people who lives under the same shelter and who share a common budget is called a household.  Households of various societies can be in the forms of nuclear families or extended families.  On the one hand households are the suppliers of labour and on the other hand they are the consumers of most of goods and services produced.  Also households are the owners of factors of production.  Households perform some important duties within an economic system.  These duties are also considered as the economic decisions of households.  These duties include, 1. Making decisions related to the supply of factors 2. Making decisions related to the purchase of goods and services. 3. Making decisions related to how much is consumed and how much is saved.  Each and every country has form of a government and these governments have large authority.  Duties of a government are as follows.  Protection of economic and personal rights  Regulation of industries and businesses  Provision of goods and services  Redistribution of income  Making of rules, regulations and constitutions  There are various forms of business firms existing within an economy Example:- private, cooperative, state 26  Duties of business firms are as follows  Purchasing of factors of production  Deciding what to produce, in what quantity, how to produce and whom to produce  Producing of goods and services  Selling of goods and services at a reasonable price  Some duties of labour organizations made by labourers are as follows 1. Act in order to protect employee rights 2. Influence over employment, production technology and wage level  Non-governmental organizations that have emerged in modern economies have some important duties. These duties show a similarity to the duties of a government.  Example :- Elimination of poverty Protection of environment Providing welfare for the affected people at natural disasters. 27 Competency level 1.7 : Classifies economic systems using various criteria. Number of periods: 06 Expected Learning Outcomes :  Describes the criteria for the classification of economic systems.  Defines the market economic system.  Explains the characteristics and operation of the market economic system.  Analyses the ways of solving basic economic problems by a market economic system.  Defines the command economic system.  Explains the characteristics and operation of the command economic system.  Analyses the ways of solving basic economic problems by a command economic system.  Defines the mixed economic system.  Explains the characteristic and operation of the mixed economic system.  Analyses the way of solving basic economic problems by a mixed economic system.  Inquires the recent trends of economic systems.  Lists the criteria used to assess the duty of economic system. A Guidelines to Explain the Subject Matters:  An economic system operates following an institutional structure which consists of laws, traditions and values.  Based on diffrent forms of these institutional structures differences can be seen among economic systems.  Following this some criteria are being used to classify economic systems.  Decision co - ordination mechanism  Ownership of property  Nature of incentives 28  Based on decision co– ordination mechanism economic system can be classified as follows.  Market economic system  Command economic system  Based on ownership of resources and property rights economic systems can be classified as follows.  Capitalist economic system  Socialist economic system  Differences can be observed between capitalist economic system and socialist economic system based on the criteria of resource ownership and property rights.  Private sector property at a capitalist economy while government owns property at a socialist economy.  Incentives that can be seen in different economic systems are three types.  Material incentives  Moral incentives  Coercive incentives  Material incentives are dominant within a market economy. Profit earning act as an incentive.  Coercive incentives can be seen within a command economy.  Incentives also operate in the form of morals. At the situation of natural disaster or collapse of government people make right decisions and act accordingly.  Considering all above mentioned criteria which use to classify economic systems, they are classified as follows.  Market economic system  Planned economic system  Mixed economic system 29  Market economic system is the economic system which solve basic economic problems based on the price determined by market demand and supply.  Market economic system also named as capitalist economic system or as laissez faire.  Basic characteristics of a market economic system are as follows.  Private ownership of property  Freedom of choice or free entrepreneur  Competitive market situation  Incentives based on self interest  Operation of price mechanism  Consumer sovereignty  Limited role for the government  Price mechanism act as the co– ordination mechanism of solving basic economic problems of a market economy.  Price performs three important functions within a market economy  Signaling Function  Incentive Function  Rationing Function  Self-interest is the determinant factor of the behavior of economic agents of a market economic system. Social welfare is neglected within a market economy.  Basis of market economic system is the private ownership of property. Free entrepreneur combines with private ownership of property is also considered as a main characteristic of a market economic system.  The economic system which solve basic economic problems by the commands provided by a central planned authority is known as command economic system. 30   Characteristics of a central planned economic system are as follows  Public ownership of property except labour.  Use of planned mechanism to solve basic economic problems.  Act based on social welfare.  Act to achieve public well being.  Decisions related to what to produce, how to produce and whom to produce are taken by the central planned authority  Weaknesses of command economic system are as follows.  Problem related to coordination and organization.  Collapse of quality control  Insufficiency of incentives  Environmental degradation  The economic system where resources are distributed using both price mechanism and planned mechanism is known as a mixed economic system.  Characteristics of a mixed economic system are as follows.  Consumer, producer, owners of factors of production and government are the active agents of the economy.  Self interest is the motivational factor of the private sector and social welfare is the motivational factor of the public sector.  Both private and public sector own recourses.  Decisions related to resources allocation is done through planned mechanism and competition operates through private sector.  Some examples for mixed economic systems are given below. 1. Social market economy 2. Socialist market economy 31  Market economic system where government intervenes to promote social justice is known as a social market economy. This economic system highly emphasize on social justice.  Social market economy is a controversy for liberal market economy. where liberal market economy emphasize operation of economy through market forces without any government intervention.  According to liberalists intervention of government affects to limit person’s freedom and loss of efficiency of market mechanism.  People who reject ideas of liberalists and support social market economy believe that to promote social justice intervention of government is as necessary.  Although resources of a social market economy owned by the private sector, government highly influence over the usage of these resources. Government intervenes to protect human rights in the fields of economic, political, civil, social and cultural and implement broad social networks.  In the situations of basic human rights of citizens endanger or violated within a social market economy government provides a protection for them.  In the situations where a person face disaster or an accident while engage in employment or social situation of ageing, poverty and unemployment social market economies provide social protection network.  Government collect most of funds to provide such social protection networks through impose of taxes. Citizens of a social market economy willingly pay taxes as they know they will receive social benefits from the government.  Norway, Germany, Sweden and Finland are the examples for social market economic system.  Economic systems which operate basically through socialist ideology and to some extent which operates through market forces are known as social market economies. 32  A socialist market economy is totally different from a social market economy. In this economic system government owns resources. However, decisions related to resource usage are taken by the private sector. Production firms have the right to determine price of goods and the quantity.  China, Hungaria Bulgaria are some examples for socialist market economies.  New traditional economic systems are a recent trend for economic systems.  IN this a trend moving towards new cultural framework based on a religion or a traditional society can be seen.  Criteria used to assess the duty of an economic system are as follows.  Full employment  Economic efficiency  Economic growth  Price stability  Fair distribution of income  External stability  Quality of environment  Economic freedom 33 Competency level 1.8 : Analyses the behaviour of opportunity cost using the Production Possibility Frontier. Number of periods : 06 Expected Learning Outcomes: Defines the Production Possibility Frontier. Names the assumptions used to construct the Production Possibility Frontier. Creates Production Possibility Frontier under the constant and increasing opportunity cost situations. Analyses the behaviour of opportunity cost using the Production Possibility Frontier. Presents the factors influencing constant and increasing opportunity cost situations. Confirms that increasing opportunity cost situation is as more realistic. Instructions for Lesson Planning:  Ask students to think of a housing project which is proposed to be implemented on a 50,000 sq. feet land with construction of houses of 1000 sq. feet and 2000 sq feet.  Inquire students only if 1000sq. feet houses are constructed on this land how many houses can be constructed?  Similarly Inquire students only if 2000 sq. feet houses are constructed on this land how many houses can be constructed?  Also inquire from students when constructing 2000sq. feet houses on this land how much of other type of houses should be forgone.  Conduct a discussion highlighting the facts mentioned below. 34   On a 50,000 sq. feet land, only 25 houses of 2000sq. feet and only 50 houses of 1000 sq. feet can be constructed.  When increasing 2000 sq feet houses, two houses of 1000sq. feet houses should be forgone. Proposed Instructions for Learning :  Focus attention on the production institute received by your group from the production institutes given below Institute of Ayesha Text Ayesha Text Institute had a limited amount of resources such as: land labor and capital.In a given situation Ayesha text planned to produce shirts and trousers employing the above resources fully with maximum efficiency. If he employs all the available resources on shirts production he can produces only 50 shirts. When he shifts the resources employed for the shirts production to trousers production by reducing 10 units of shirts he can increase by 5 units of trousers. If all the resources are employed for the trousers production 25 trousers could be produced Institute of Vijira Enterprise Vajira produces either rice or clothes employing a certain amount of the available limited resources. He can produces only 45 units of clothes in a given situating by using the existing technology and employing the available resources fully to the maximum. When increasing rice production by one unit clothes production should be reduced by 2, 3, 10, 14, and 16, respectively. When the cloth production is zero maximum rice production is 05 units  Study the information of the production received by you.  Prepare a table with the combination of the production of two goods through the above information.  Indicate in the chart itself the amount of units forgone in one production when increasing one unit of the other product.  Using the above table, create a graph indicating the alternative combinations of the two goods.  Express your view on the shape of the graph. 35   Explain the nature of the opportunity cost using the table and the graph.  Be ready to present your findings creatively to the whole class. A Guidelines to Explain the Subject Matters:  At a given period of time by utilizing all the resources of an economy fully with maximum efficiency and with prevailing technology, the line drown on combining the maximum combination of output of two goods is known as Production Possibility Frontier.  The Production Possibility Frontier is also identified as Production Possibility Curve.  Factors determine the Production Possibility Frontier of an economy can be shown as follows 1. Resources endowment  Land  Labour  Capital  Entrepreneurship 2. Factor productivity  Technology  Management  Human capital  Division of labour and specialization  The following assumptions are used when drawing a production possibility curve.  Production of only two goods  Resource stock remains constant  Technology remains constant during the concerned period  Fully utilization of resources with maximum efficiency 36  When moving along a production possibility curve the ratio between forgone amount of the other goods when increasing the fixed amount of goods is identified as the slope or the gradient.  Slope shows the marginal opportunity cost.  According to the behavior of the marginal opportunity cost of the production possibility curve few forms of opportunity cost exit. 1. Constant opportunity cost 2. Increasing opportunity cost  When moving along a production possibility curve with increasing the fixed amount of a certain goods the situation of remaining the forgone amount of the other good unchanged is identified as constant opportunity cost. The shape of the production possibility curve with this type of opportunity cost is linear in its nature. It is shown by the graph below. Good 20 A 16 B 12 C 8 D E 4 Good 0 F 1 2 3 4 5  Opportunity cost of a production possibility curve can be estimated using the equation below.. Opportunity cost =  The behavior of opportunity cost on a liner production possibility curve is shown by the table below. 37 Combinations of goods Opportunity cost of the Opportunity cost of the production goods production goods A–B B- C C–D D–E E-F  When moving along the production possibility curve by increasing the fixed amount of a certain goods the situation of increasing the amount of forgone good is identified as increasing opportunity cost.  The shape of the Production Possibility Curve with this type of opportunity cost is concave to the origin.  It is shown by the graph below. Good Y (units) A B 200 When moving along Production Possibility 180 C 150 Curve downwards the ratio of gradually 110 D increases. 60 E Good X (units) 0 20 40 60 80 100 38   The behavior of increasing opportunity cost of a Production Possibility Curve which is concave to the origin is shown below.  The factors affecting constant and increasing opportunity cost can be stated as follows Reasons for constant opportunity cost Reasons for increasing opportunity cost  Homogeneous Resources  Non-homogeneous Resources  The resources efficient for one  The resources efficient for one industry are the same for the industry are not efficient for the other industry. other Industry.  From the above mentioned opportunity cost situations, increasing opportunity cost is more realistic  Because of this, increasing opportunity cost is used for various economic analysis. 39 Competency level 1.9 : Represents basic concepts of economics and change of production capacity using Production Possibility Frontier. Number of periods : 08 Expected Learning Outcomes: Presents microeconomic concepts with Production Possibility Frontier. Presents macroeconomic concepts with production possibility Frontier. Shows change in production capacity with Production Possibility Frontier based on the factors affecting production capacity. A Guidelines to Explain the Subject Matters:  Micro and macro economic concepts can be presented with a Production Possibility Frontier.  Examples for some of the micro economic concepts are given below  Scarcity  Alternative uses  Choice  Opportunity cost  Productive efficiency  Allocative efficiency  Scarcity, alternative uses and choice can be presented by a Production Possibility Frontier as below. 40  According to the above graph, point A represents scarcity as the resouces of the economy are not enough to produce the combinition of goods shown by the point A.  There are lots of alternative product combinitions exist on the Production Possibility Frontier. Points A, B and C show some of the combinations.  An economy should select one combination from the available combinations. According to the above example economy should select one combination from the combinations of B and C.  Opportunity cost is defined as the value of the next best alternative forgone when selecting among scare resources of a particular economic activity. Consumer goods 300 200 A 100 B Capital goods 0 150 180 200  According to the above example, if this economy selecst the combination of A the opportunity cost of 200units of consumer goods is the 50units of capital goods and opportunity cost of 150 units of capital goods is the 100 units of consumer goods.  If this economy decided to more from A to B the opportunity cost of producing 30 units of capital goods would be the 100 units of consumer goods mean while if it decided to move from B to A the opportunity cost of producing 100 units of consumer goods would be the 30 units of capital goods.  Production efficiency means achieving of maximum output from all resources of an economy. This can be shown by any point on the 41  Production Possibility Frontier. Two main conditions are necessary for the production efficiency. They are full employment and full production.  Allocative efficiency means distribution of limited resources of an economy based on society’s preference. Condition for this is Price = Marginal cost(P=MC) or Marginal Cost = Marginal Revenue (MC=MR). Allocative efficiency can be shown by only one point on the Production Possibility Frontier.  The benefit gain by the consumption of an additional unit of a particular goods is known as marginal benefit. It would be the maximum price that the consumer is willing to pay for the good. Therefore marginal benefit will be equal to price. The amount added to the total cost When increasing the output of a particular good by one unit is called marginal cost(MC).  The sum of allocative efficiency and productive efficiency is known as economic efficiency.  It can be shown by the following graph. Production efficiency Economic efficiency Agricultural goods + B Allocative efficiency A Production efficiency C 0 Industrial goods MR,MC,P Marginal cost (MC) or Marginal benefit(MB) 10 Q 42  Examples for the macro economic concepts are given below  Full employment  Unemployment (Underemployment of Resources)  Economic Recession  Economic depression  Economic Growth  Economic decline  Allocation of resources between present consumption and future consumption  Production efficiency  Productive employment of all resources of an economy within a production process is called full employment  Full employment can be shown by a point on the Production Possibility Frontier as follows. Consumer goods C A B Capital goods 0  According to the above graph point A shows full employment and point B shows the underemployment situation. Under employment means employing of resources in a way which does provide maximum productivity. Example. Employing Sri Lankan graduates in the management services.  According to above graph point B shows unemployment of the economy. 43  Economic recession means decreasing of production due to decrease in demand for goods and services in an economy. Economic recession is a short term phenomenon and unemployment situation increases with it. According to above graph it can be shown by a movement from A to B.  Long term situation of an economic recession is known as economic depression. In this situation as unemployed resources can be destroyed, Production Possibility Curve shift to the left due to decrease in resources stock. In a short term of depression, where the resources do not destroy a point will shift to the left. Agricultural goods Agricultural goods A B 0 0 Industrial goods A B Industrial goods First graph Second graph  An economic depression situation without destroying resources can be shown by a movement from A to B in the first graph.  According to the second graph because there is an economic depression with destroying of resources the Production Possibility Curve shifts to left side.  Continuous increase in real output of an economy throughout a long period is called an economic growth. Production Possibility Curve shifts to the right during an economic growth situation. It can be shown by the following graph. 44  An economy’s future resource stock is determined by the way of utilizing scarce resources. If more resources are utilized for current consumption, production of capital goods will be decreased in future. In this way decrease in the production of capital goods will reduce future production possibility and it will be a barrier for economic growth.  Following this , allocation of resources between present and future consumption is an important determination of economic growth  It is shown by the graph below 45  According to first graph as the economy allocated more resources towards the consumption economic growth rate was lower.  According to second graph, as the economy allocated more resource for the production of capital goods than consumer goods, economic growth rate was higher.  If any country has the possibility to import capital goods, where they have no room to sacrifice present consumption, can reach fast economic growth by increasing investment with out limiting present consumption.  Two main factors affect changing the production capacity of a country  change in resource  change in Productivity  Due to change in resources stock and technology of an economy, production capacity or the production possibility of an economy changes.  Change in resources stock of an economy takes place in two forms  Decrease in resources stock  Increase in resources stock  Due to increase in resource stock, an economy production possibility will increases and production possibility curve shifts to the right. Example – Discovering of new resources Obtaining new ownership for resources Inflow of resources from foreign countries Increase in resource stock trough new technology Increase in foreign loans aids and investment  It can be shown by the graph below 46  Due to decrease in resource stock, economy’s production possibility will decreases and production possibility curve shifts to the left. Example – Destroying of resources due to war Natural disasters such as Tsunami, floods and land slides Decrease in foreign investment  It can be shown by the graph below  Due to increase in productivity of resources, production possibility curve shift to the right as the production possibility of the economy increases. Examples – Improvement in technology, new techniques, providing of training to the workers by the government.  If increase in productivity happens only in one sector, production possibility curve will shifts only from that sector.  It can be shown by the graph below 47  According to the first graph productivity of consumer and capital goods have increased, Production Possibility curve shift to the right by both side.  According to the second graph as productivity increases only with capital good, Production Possibility Curve shift to the right only by that side.  Due to decrease in productivity of resource production possibility curve shift to the left due to decrease in production possibility. Example - Net out migration of skilled workers , Use of outdated techniques  It can be show by the graph below  According to the first graph, due to decrease in productivity of both agricultural and industrial goods production possibility curve shifts to the left. According to the second graph, due to decrease in productivity of industrial goods production possibility curve shifts to the left only by that side. 48 Competency 2 : Analyses demand, supply, elasticity and market equilibrium. Competency Level 2.1 : Analyses the theory of demand and the law of demand according to determinants of demand. Number of periods : 08 Expected Learning Outcomes :  Defines the demand.  Explains the difference between individual demand and market demand.  Names the determinants of demand.  Explains how each determinant of demand affects demand.  Explains the demand function.  Defines the Law of Demand.  Present Law of Demand using demand schedule, demand curve and demand equation.  Names price effect which is a reason for the law of demand.  Confirms Law of Demand with the use of substitution effect and income effect.  Explains exceptions to the law of demand. Instructions for Lesson Planning :  Observe, a student going to a shop.  Examine, what the purchases are.  Examine, the basic factors in buying those goods.  Conduct a discussion by highlighting the following points.  People demand goods to fulfill their wants.  Factors given below create demand.  Want  Purchasing power  Planning to buy 49   Demand based on the factors above can be named as effective demand.  Group the students and deploy them to do the activity giving instructions. Proposed Instructions for Learning :  Pay attention to the topic which your group has received.  Individual demand  All persons demand  Study the conversation received by your group.  Define the topic  List the determinants of demand according to the topic  Explain how each determinant affects demand.  Show the relationship between demand and determinant of demand through graphs. Conversation: Uththara, Vishva & Thilini are friends working in the same office. A part of the conversation that happened among them at the lunch break is given below. Uththara - The price of bread increases day by day unbelievably. Therefore it is difficult to eat bread every night like previously. Now we eat different things, instead of bread. Vishva- Now we also eat very little bread. My husband said that there was an article in the news paper that the possibility of contracting diabetes is high among people who consume bread mostly. He brings bread rarely after that article. Now his office friends also has reduced the level of consumption of bread. However, a good thing has happened due to this. Using jam and butter also has reduced. I think butter is not necessary without bread. Thilini- Actually it is very difficult to eat bread on our salary with the price of bread. But our son likes to eat bread very much.. Because of that I have to take a loaf of bread when I go home everyday. Uththara - Thilini, instead of bread give them string hoppers or hoppers. Vishva- However, the people who live in the cities have not decreased their eating bread, yet. 50 Uththara - Why is that? Vishva- The husband and wife of a family in the city both work. So they do not prepare dinner. Because of that, they eat bread for dinner. Thilini- Not only that, there are more wealthy people in the city than in the village. They like to have a light food for breakfast and dinner. Therefore they eat bread although the price has increased. Uththara - If others decrease eating bread like us, how many will reduce eating bread. If it happens like that, the demand for bread will be reduced at a higher rate. A Guidelines to Explain the Subject Matters:  In a certain period of time, when other factors remain constant, various quantities ready to buy at various prices of a good is called as demand.  The demand can be classified as follows,  Individual demand  Market demand  At a certain period of time, , the various quantities ready to buy by a person at various prices of good is individual demand.  At a certain period of time, the various quantities ready to buy by sum of all individuals at various prices of good is called as market demand.  Determinants of individual demand can be listed as below.  Price of the concerned goods(P)  Price of the related goods(Pn)  Consumer Income( Y)  Consumers’ Taste (T)  Future expectations (Ex)  Other factors (O)  Determinants of market demand can be listed as below.  Price of the concerned goods(P)  Price of the related goods(Pn)  Consumer Income( Y)  Consumers’ Taste (T)  Future expectations (Ex) 51   Number of buyers and the composition (N)  Other factors (O)  In addition to the determinants of individual demand, determinant of the number of buyers and it competition affect for the market demand.  When showing the relationship between individual demand and determinants of demand as an equation it is named as individual demand function. Qd= f(P, Pn, Y, T, Ex, O)  When showing the relationship between market demand and the determinants of market demand as an equation it is named as “Market demand function”. Qd= f(P, Pn, Y, T, Ex, N,O)  Analysis of the changes of demand according to the changes of any determinants of demand is called theory of demand.  In a certain period of time, when other factors affecting demand remains constant the inverse relationship between price and the quantity demand of goods, is called the law of demand.  The Law of Demand has following assumptions below.  Considers price and quantity demanded at a certain time period  Other factors affecting demand remain constant except the price  Considers demand of a normal good  Considers behavior of rational buyers  The alternative methods which represent The Law of Demand are as follows.  Demand schedule  Demand curve  Demand equation  During a certain period of time, when other factors remain constant, the schedule that indicated the expected quantity demanded of consumers at alternative prices is named as demand schedule. 52  Price of the considering(P) Expected quantity demand(Q) 0 600 10 500 20 400 30 300 40 200 50 100 60 0  In a certain period of time, when other factors remain constant, the curve showing the quantity demanded at alternative prices is called a demand curve. Price 60 50 Demand curve 40 30 20 10 D 0 100 200 300 400 500 600 Quantity of demand   In a certain period of time, when other factors remain constant, the equation showing a relationship between quantity demanded and the price of the good concerned is called demand equation.  The common equation of a liner demand curve which slopes downward can be stated as below, Qd = a – bp 53  Qd = Quantity demanded(dependent variable) a= Quantity demanded at zero price b = Variance of the slope of the demand curve b P = Price of the concerned goods(independent variable)  The inverse relationship between price and quantity demanded can be presented by a demand equation.  The related demand equation to the above demand curve has been given as follows. a= 600 b Qd = 600-10P  The demand curve for a normal good slope downward.  The demand curve of a normal goods slope is downwards because there is an inverse relationship between price and quantity demanded.  The reasons for the inverse relationship between price and quantity demanded are given below.  Substitution effect of a price change  Income effect of a price change  When other factors remain constant including the price of substitute goods, due to increase or decrease of the price of concerned goods, change of quantity demand of the considering good as a result of increase or decrease in relative price of the good is known as substitute effect  When other factors remain constant including the nominal income of consumers, changes of the quantity demanded according to the changes of real income is called income effect.  The income effects shows a positive relationship when the price of a normal good increases or decreases. The substitution effects of a normal good always shows a negative relationship when the price of a good decreases or increases.  When price of a normal good increases or decreases the operation of price effect is shown by the schedule below. 54  Change in Price Substitution Income effect Price Effect effect Decrease price - (Negative) + (Positive) - (Negative) Increase price - (Negative) + (Positive) - (Negative)  Increase of the quantity demanded from 200 to 300 when the price decrease from Rs.20.00 to Rs. 10.00 is called expansion in demand.  Decrease of the quantity demanded from 200 to 100 when the price increase from Rs.10.00 to Rs. 20.00 is called contraction demand.  Exceptions to the law of demand are given below.  Giffen goods  Demonstrative goods  There is a positive relationship exits to between price these goods and the quantity demand of as the quantity demanded increases when the price increases and the quantity demanded decreases when the price decreases. Because of this demand curve slopes upwards. 55  Price  D       Quantity of demand   When the price of a Giffen good increases or decreases the substitution effects always shows a negative relationship and income effects shows a strong negative relationship.  When increase the price of demonstrative goods the quantity demanded increases to shows the artificial status of the buyer. Example: Increase the demand for expensive vehicles and diamonds to show-off. Therefor demonstrative goods show an exception to the of demand. 56 Competency Level 2.2 : Compares the differences between the changes of quantity demanded and change in demand. Number of periods :06 Expected Learning Outcomes :  Compares the differences between changes of quantity demanded and change in demand presented separately.  Presents the factors affecting change of quantity demand and change in demand separately.  Analyses the change in quantity demanded by a demand curve.  Ana