Economy and Central Problems of an Economy PDF

Economy and Central CHAPTER 1 Problems of an Economy TOPICS TO BE COVERED ‰ Economy ‰ Economics ‰ Scarcity ‰ Types of Economics ‰ Central Problems of Economics ‰ Types of Economies ‰ Positive and Nor...

Economy and Central CHAPTER 1 Problems of an Economy TOPICS TO BE COVERED ‰ Economy ‰ Economics ‰ Scarcity ‰ Types of Economics ‰ Central Problems of Economics ‰ Types of Economies ‰ Positive and Normative Economics ‰ Opportunity Cost ‰ Production Possibility Curve (PPC) ‰ Shift in Production Possibility Curve (PPC) ‰ Rotation of Production Possibility Curve (PPC) ECONOMY Economy is the study of human activity, specifically the actions people engage in to ensure their livelihood. Economy is the place where people live and earn. ‰ ACTIVITIES  Consumption: The utilization or use of goods and services by individuals or households to satisfy their needs and wants. It involves the final use of products for personal satisfaction.  Production: The process of creating goods and services by combining inputs like labour, capital, and resources. It aims to generate output that can meet the demands of consumers and contribute to economic growth.  Investment: The allocation of resources, usually money, into assets or projects with the expectation of generating future income or profit. In an economic context, it often refers to spending on capital goods or ventures to enhance productivity.  Exchange of Goods and Services: The transfer of products or services between parties, often involving a transaction where something is given in return for something else. This exchange can occur through various means, such as barter or monetary transactions in a market.  ECONOMICS Economics is the study of economic difficulties that arise as a result of restricted resources in connection to our needs/wants. It is concerned with the problem of rational resource management. SCARCITY It occurs when the demand for a commodity exceeds the supply. ‰ Scarcity and Problem of Choice go hand in hand  Scarce Resources  Unlimited Wants  Alternate uses Resources are limited but wants are unlimited. So, a person has to choose those needs which are important for him and use the resources in such a manner so that he can get maximum level of satisfaction. ‰ Economizing of Resources It refers to the most efficient use of resources or the use of resources in such a way that a person receives the greatest amount of satisfaction. TYPES OF ECONOMICS  Microeconomics: Microeconomics is the branch of Economics that investigates the behaviour of individual economic units.  Macroeconomics: Macroeconomics is the branch of economics that investigates the aggregate behaviour of the economy as a whole. ‰ Difference between Microeconomics & Macroeconomics Basis Micro Economics Macro Economics Meaning Microeconomics is the branch of Macroeconomics is the branch of Economics that investigates the economics that investigates the aggregate behaviour of individual economic behaviour of the economy as a whole. units. Tools The main instruments of Micro Macroeconomic instruments include Economics are demand and supply. aggregate demand and aggregate supply. Basic Its goal is to determine a commodity's Its goal is to determine the country's Objectives price. income and employment level. Degree of It involves only a minor amount of It involves a significant amount of Aggregation Aggregation. Aggregation. Assumption It requires that all macroeconomic It requires that all of the micro variables, variables, such as national income, such as product pricing, demand, and employment, aggregate demand, and supply, are constant. aggregate supply, are constant. 4 Introductory Microeconomics Part-B PW  Known as It is also known as “Price Theory” It is also known as “Income and Employment Theory”. Examples ‰ Individual Income ‰ National Income ‰ Individual Demand ‰ Aggregate Demand ‰ Individual Supply ‰ Aggregate Supply ‰ Individual output ‰ National output CENTRAL/ECONOMIC PROBLEMS (AT MICRO LEVEL)  What to produce  How to produce  Whom to produce ‰ What to produce: Because resources are limited, this is one of the most essential central problems of an economy. As a result, the producer cannot make whatever commodity he desires. As a result, he will have to determine both the nature and quantity of the commodity. 1. Product nature and type: The producer will first select whether to create consumer goods like shoes, clothes, bread, butter, and so on, or capital goods such as machines, tractors, and so on, or wartime products such as tanks, weapons, and bombs. 2. Product quantity: After determining the nature of the commodity, the producer will determine how much consumer goods, capital goods, or wartime products will be produced. ‰ How to produce: This issue is mostly concerned with technique selection. There are two sorts of production techniques: 1. Labour-Intensive approach: In this approach, more labour is needed for production. This type of strategy is useful for addressing the economy’s unemployment problem. 2. Capital-Intensive approach: In this approach, the producer uses machinery to make goods, which aids in improving the economy’s output capacity. ‰ Whom to produce: Under this, the producer will choose whether to produce for rich or for impoverished people.  Rich People: If the producer decides to create for the wealthy segment of society, he will maintain the price high in order to maximise profit.  Poor People: If the producer decides to make the items for the poor, he will keep the price cheap. TYPES OF ECONOMICS Social Economy/Centrally Planned Economy  The government makes all choices in this economy on what to produce, how to produce, and for whom to produce. Economy and Central Problems of an Economy 5  The government is very essential in the economy.  The primary goal is social welfare.  Commodity prices are determined by Planning Authorities.  Eg: North Korea Market Economy/Capitalist Economy  In this economy, market forces makes all decisions about what to produce, how to produce, and for whom to produce.  The role of government is simply to enforce laws and orders.  Profit maximisation is the primary goal.  The commodity’s price is governed by market forces such as demand and supply.  Eg: USA Mixed Economy  In this economy, both the government and individuals have an essential role in making economic decisions.  Individuals and governments both play vital roles.  Profit maximisation and social welfare are the primary goals.  Commodity prices are determined by both market forces of demand and supply as well as by the planning agencies.  Eg: India POSITIVE ECONOMICS AND NORMATIVE ECONOMICS Basis Positive Economics Normative Economics Meaning It is concerned with what is or how It is concerned with what should be or economic problems are actually how economic problems should be solved. solved. Purpose It seeks to provide a true description It seeks to establish ideas. of an economic activity. Verification It is validated using actual data. It cannot be validated using actual data. Value It makes no value determinations. It renders value judgements. Judgements Suggestive It is based on facts and data. It is based on personal preferences. Examples 1. India's population is constantly 1. The government ought to take action growing. to keep the population under control. 2. The problem of inflation is 2. India should take measures to reduce constantly worsening. inflation. 3. The problem of unemployment 3. The government should take and poverty is getting worse. initiatives to address the issue of unemployment and poverty. 6 Introductory Microeconomics Part-B PW  OPPORTUNITY COST To take advantage of one chance, the producer must forgo the other opportunity. Illustration: Crops Market Value Wheat 3000 Rice 2500 Maize 2000 Sugarcane 1500 The data clearly shows that the logical farmer will select wheat cultivation since it offers him the highest market price. To cultivate wheat, the producer must forego another excellent chance, rice, which has a market worth of 2500. PRODUCTION POSSIBILITY CURVE (PPC) PPC displays a graphical representation of several possible combinations of two items that a producer want to make under the provided assumption:  Full and efficient resource use.  Technology does not change. Also known as the Production Possibility Frontier, Transformation Boundary, and Transformation Frontier. ASSUMPTIONS OF PPC 1. Resources are limited. 2. Fuller utilization of resources. 3. Production technology remains constant. 4. MRT is rising, and no resource is equally efficient in the production of both the goods. 5. Only two goods are produced. MARGINAL RATE OF TRANSRFORMATION (MRT) It refers to change in the production of good-1 due to change in the production of good-2. Change in production of good-1 MRT = Change in production of good-2 Economy and Central Problems of an Economy 7  Combinations Wheat (kg) Rice (kg) A 100 0 B 90 10 C 70 20 D 40 30 E 0 40 This table clearly depicts the Increasing Marginal rate of Transformation, as in order to produce more units of rice, the production of wheat is sacrificed at an increasing rate. ‰ Properties of PPC 1. PPC slopes downward: PPC is sloped downward due to the inverse relationship between the production of both items. This means that if a manufacturer wishes to raise the output of Good-X, he must sacrifice some units of Good-Y. Because resources are limited, he cannot boost production of both items at the same time. 2. PPC is concave: PPC is concave due to rising Marginal Opportunity Cost (MOC). It indicates that for every extra unit of Good-X produced, the producer must sacrifice an increasing number of units of Good-Y. 3. PPC can shift to the right or left depending on the available resources: When resources are increased, the PPC curve shifts to the right. However, if resources are reduced, the PPC curve swings to the left. IF MRT IS NOT INCREASING There are two possibilities 1. MRT is constant 2. MRT is falling 1. MRT is constant If MRT is constant it means that every time society is required to produce one additional unit of goods the rate of sacrifice of another goods are same. It means that all resources are equally efficient in production of goods. Combination Good X Good Y MRT A 0 5 — B 1 4 1:1 C 2 3 1:1 D 3 2 1:1 E 4 1 1:1 F 5 0 1:1 8 Introductory Microeconomics Part-B PW  Y A Good Y X B Good X 2. MRT is falling It means everytime additional unit of a good to be produced, the number of unit of other goods sacrificed goes on decreasing. PPC is convex in this case. Combination Good X Good Y MRT A 0 10 — B 1 6 4:1 C 2 3 3:1 D 3 1 2:1 E 4 0 1:1 Y A Good Y X B Good X Reasons for Reasons for No change S. No. Rightward Shift Leftward Shift in PPC 1. Increase in resources Decrease in resouces. Transfer of resources. 2. Improvement in technology Technological obsoletion. Unemployment Eradication Programme. 3. Skill Development Natural calamities (flood, Programme (Training) earthquake, Tsunami, drought etc.) 4. Education for all Migration 5. Clean India campagn War, terrorism 6. Yoga enhancement plans (health) Economy and Central Problems of an Economy 9  7. Beti Bachao, Beti Padhao (education) 8. Make in India (investment) 9. Increase in Foreign capital (capital investment) SHIFT IN PRODUCTION POSSIBILITY CURVE ‰ When Resources Increase: Every economy tries to increase its resources so that more can Y be produced. PPC is based on the assumption that resources are fixed more of one good can be produced only by sacrificing some quantity of other goods. We cannot produce more of both Good Y the goods. However, when resources increased we can produce more of both goods. Therefore, PPC shifts upward or rightward. ‰ When Technology Changes: Generally change in technology is for better. Better technology X means that more can be produced of both the good. Thus PPC Good X shifts upward or rightward. Y Good Y X Good X ‰ When Resources Decreases: Y Resources with the society may decrease due to unusual happening like war, natural calamities like floods, earthquakes, epidemics. Large scale migration of population to other Good Y countries. In such situations production potential of the economy decreases. Thus PPC shifts, leftward or downward. A lot of people died and many factories were destroyed in an earthquake. How will it affect the PPF of the economy? X Good X PPF of the economy will shift to the leftward. It happens because Shift of PP Frontier when the number of possible combination available with the economy Resources Decrease has decreased, due to destruction of resources in the economy. 10 Introductory Microeconomics Part-B PW  Y Leftward shift in PPF PPF shifts to the left from PP to P1P1 when there is Guns (in units) decreased in resources or/and technological degradation of both guns and butter. X O Butter (in units) Massive unemployment will shift the PPF to the left. Defend or refute. The given statement is refuted. Massive unemployment does not decrease the capacity of economy to produce. So, there will be no shfit of PPF. However, economy will operate at some point inside the PPF, due to underutilization of human resources. ROTATION OF PPF It happens when there is change in productive capacity (resources or technology) with respect to only one good. The rotation can be either for the commodity on the X-axis or for commodity on the Y-axis. 1. Rotation for commodity on the X-axis: Where there is a technology improvement or an increase in resources for production of the commodity on the X-axis (say butter), then PPF will rotate from AB to AC. However, in case of technological degradation or decrease in resources for production of butter then PPF will rotate to the left from AB to AD. Y Rotation for commodity A on the X-axis. Guns (in units) Rightward Leftward rotation rotation X O D B C Butter (in units) 2. Rotation for commodity on the Y-axis: A technological improvement or an increase in resources for production of commodity on Y-axis (say, butter) will rotate the PPF from AB to CB. However, in case of degradation in technology or a decrease in resources for production of guns, will rotate the PPF to the left from AB to DB as shown in figure. Economy and Central Problems of an Economy 11  Y Rotation for community on the Y-axis. C Rightward A rotation Guns (in units) D Leftward rotation X B Butter (in units) OVERVIEW OF PPF Let us quickly revise the concept of PPF with the help of diagram. Y P1 E Unattainable point A P Commodity-Y P2 B Inward shift Outward D shift O Underutilisation O X P2 P P1 of resources Commodity-X MULTIPLE CHOICE QUESTIONS 1. Give an example of a microeconomic variable. 3. Economic problems arise because? (KVS SQP 2020-21) (CBSE SQP 2020-21) (a) Wholesale price index (a) Wants are unlimited (b) National income (b) Alternative uses of resources (c) Market demand (c) Resources are scarce (d) Aggregate demand (d) All of these 2. Which of the following is not concerned with 4. Normative economics deals with: the problem of choice? (CBSE SQP 2021-22)  (KVS SQP 2020-21) (a) Facts (a) Excessive income (b) opinions (b) Alternative use of resources (c) both (a) and (b) (c) Unlimited wants (d) none of these (d) Limited resources 12 Introductory Microeconomics Part-B PW  5. Which of the following is an example of (a) Market economy economic activity? (CBSE SQP 2022-23) (b) centrally planned economy (a) Production (b) consumption (c) mixed economy (c) exchange (d) all of these (d) none of these 6. Economic problem arises due to: 12. The resources for satisfying human wants (KVS SQP 2021-22) are: (KVS SQP 2021-22) (a) Limited wants (a) Limited (b) scarce means (b) unlimited (c) alternative uses (c) available at zero prices (d) both (b) and (c) (d) none of these 7. The problem of ‘what to produce’ relates to: 13. Positive economic involves statements which are: (CBSE SQP 2021-22) (CBSE SQP 2020-21) (a) Verifiable (a) The choice of technique (b) not verifiable (b) distribution of income (c) may or may not be verifiable (c) market value of the goods and services (d) none of these (d) the choice of goods and services to be produced 14. In which of the following situations, does scarcity arise? (CBSE SQP 2020-21) 8. The shape of transformation curve is changed by: (CBSE SQP 2020-21) (a) Supply of resources > Demand for resources (a) Opportunity cost (b) Supply of resources < Demand for (b) total cost resources (c) marginal opportunity cost (c) Supply for resources = Demand for (d) none of these resources 9. Which of the following is related to the (d) none of these problem ‘how to produce’? (KVS SQP 2019-20) ASSERTION AND REASON (a) Factoral distribution of income 15. Assertion (A): Microeconomics is a study of (b) the choice of technique behaviour of individual units of an economy. (c) the choice of product Reason (R): It deals with determination of (d) none of these general price level and output in the economy  (CBSE SQP 2020-21) 10. Who controls economic activity under centrally planned economies? (a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct (CBSE SQP 2022-23) explanation of Assertion (A) (a) Industrialists (b) private firms (b) Both Assertion (A) and Reason (R) are (c) government (d) consumers true and Reason (R) is not the correct 11. The government does not interfere in the explanation of Assertion (A) process of decision-making under: (c) Assertion (A) is true but Reason (R) is (CBSE SQP 2020-21) false. Economy and Central Problems of an Economy 13  (d) Assertion (A) is false but Reason (R) is (a) Both Assertion (A) and Reason (R) are true. True and Reason (R) is the correct 16. Assertion (A): Normative economics deals explanation of Assertion (A) with what ought to be (or) how an economic (b) Both Assertion (A) and Reason (R) are problem should be solved. True and Reason (R) is not the correct Reason (R): It is that branch of economics explanation of Assertion(A) which is based on opinions and judgment. (c) Assertion (A) is True but Reason (R) is (CBSE SQP 2021-22) False (a) Both Assertion (A) and Reason (R) are (d) Assertion (A) is False but Reason (R) is true and Reason (R) is the correct True explanation of Assertion (A) 19. Assertion (A): Lack of scarcity implies lack (b) Both Assertion (A) and Reason (R) are of economic problems. true and Reason (R) is not the correct Reason (R): Scarcity is the root cause of explanation of Assertion (A) economic problems. (CBSE SQP 2020-21) (c) Assertion (A) is true but Reason (R) is (a) Both Assertion(A) and Reason (R) are false. True and Reason(R) is the correct (d) Assertion (A) is false but Reason (R) is explanation of Assertion(A) true. (b) Both Assertion (A) and Reason (R) are 17. Assertion (A): ‘Both, microeconomics and True and Reason (R) is not the correct macroeconomics have same degree of explanation of Assertion (A) aggregation’. (c) Assertion (A) is True but Reason (R) is Reason (R): Micro economics involves a False limited degree of aggregation and (d) Assertion (A) is False but Reason (R) is Macroeconomics involves the highest degree True of aggregation. (KVS SQP 2020-21) 20. Assertion (A): Most resources are controlled (a) Both Assertion (A) and Reason (R) are by the government in the centrally planned True and Reason(R) is the correct economy. explanation of Assertion (A) Reason (R): The market decides at what (b) Both Assertion (A) and Reason (R) are price the goods are to be sold in the Bazaars. True and Reason (R) is not the correct (KVS SQP 2021-22) explanation of Assertion (A) (a) Both Assertion (A) and Reason (R) are (c) Assertion (A) is True but Reason (R) is True and Reason (R) is the correct False explanation of Assertion (A) (d) Assertion (A) is False but Reason (R) is (b) Both Assertion (A) and Reason (R) are True True and Reason (R) is not the correct 18. Assertion (A): Opportunity cost is the value explanation of Assertion (A) of the factor in the next best alternative use. (c) Assertion (A) is True but Reason (R) is Reason (R): It refers to the loss of output of False Good-Y when resources are shifted from the (d) Assertion (A) is False but Reason (R) is production of Good-Y to the production of True Good-X. (KVS SQP 2020-21) 14 Introductory Microeconomics Part-B PW STATEMENT BASED QUESTIONS how much quantity of each good or service 21. Statement 1: For whom to produce concerns is to be produced. with the distribution of income & wealth. Statement 2: What to produce refers to Statement 2: It is categorized as Personal whether Labour Intensive Technique or Distribution and Functional Distribution. Capital Intensive Technique. (CBSE SQP 2020-21) (KVS SQP 2021-22) (a) Both the statement are true (a) Both the statement are true (b) Both the statement are false (b) Both the statement are false (c) Statement 1 is true and Statement 2 is (c) Statement 1 is true and Statement 2 is false false (d) Statement 2 is true and Statement 1 is (d) Statement 2 is true and Statement 1 is false false 22. Statement 1: How to produce refers to which goods and services are to be produced and SUBJECTIVE TYPE QUESTIONS 1. Explain how scarcity and choice go together. 7. A lot of people died and many factories are (KVS SQP 2020-21) destroyed because of a severe earthquake in 2. “Economics is about making choices in the a country. How will it affect the country’s presence of scarcity”. Explain. PPC. (KVS SQP 2020-21) (KVS SQP 2020-21) 8. Why a production possibility curve concave? Explain. 3. Does massive unemployment shift the PPC to the left? (KVS SQP 2020-21) 9. Explain properties of a production possibilities curve. 4. What does the slope of PPC show? 10. Explain the problem of ‘what to produce’. (KVS SQP 2020-21) 11. What is ‘Marginal Rate of Transformation’? 5. From the following PP schedule calculate Explain with the help of an example. MRT of good x. 12. Explain the problem ‘How to produce’. Production A B C D E 13. For labourers working under MGNREGA possibilities Government has increased minimum Production employment from 100 to 150 days. How will of good x 0 1 2 3 4 this affect real and potential level of units production. Production 14. Explain the central problem ‘for whom to of good y 14 13 11 8 4 produce’. units 6. Can PP curve be a straight line.  (KVS SQP 2020-21) Economy and Central Problems of an Economy 15 15. Giving reason comment on the shape of 16. Explain the effects of floods in Jammu and Production Possibilities curve based on the Kashmir on its production possibilities following schedule: frontier. Good X 0 1 2 3 4 (units) Good Y 10 9 7 4 0 Answers MULTIPLE CHOICE QUESTIONS Answers 1. 2. (a) 3. (d) 4. (b) 5. (d) 6. (d) 7. (d) 8. (c) 9. (b) 10. (c) 11. (a) 12. (a) 13. (a) 14. (b) ASSERTION AND REASON 15. (c) 16. (a) 17. (d) 18. (a) 19. (a) 20. (c) STATEMENT BASED QUESTIONS 21. (a) 22. (b) Solutions SUBJECTIVE TYPE QUESTIONS wants are no longer unlimited, where is the 1. Resources are not only scarce but also have problem of choice? The problem of choice alternative uses. Thus, land can be used for then ceases to exist; accordingly there should producing wheat or for constructing factories. be no economic problem and no economic Hence,the problem of choice which is the as such. essence of any economic problem. However, 3. Massive unemployment will shift the PPC to if resources were not scarce, one could have the left because labour force remains anything anytime and there would be no underutilized. The economy will produce problem of choice. inside the PPC indicating underutilization of 2. If there were no scarcity, there would not resources. have been any economic problem, or the 4. The slope of PPC indicates the increasing problem related to ‘choice’. In the absence of marginal opportunity cost as every next time scarcity the concept of unlimited wants does more and more efficient resources are not exist. When resources are not limited and sacrificed. 16 Introductory Microeconomics Part-B PW  Production X Good ‘X’ Good ‘Y’ Possibilities 10 9 A 0 10 8 B 1 9 7 6 C 2 7 5 D 4 4 4 3 E 4 0 2 1 Y 0 1 2 3 5. Production of good X units Production of good Y units MRT = DY ÷ DX 0 14 — 1 13 1:1 2 11 2:1 3 8 3:1 4 4 4:1 6. Yes , if we assume that MRT is constant, When marginal rate of transformation remains constants, it means that for every additional unit increase in the production of one good, the sacrifice of the production of other goods remains the same. This happens when resources are equally efficient in the production of different goods in this case we get a downward sloping straight line production possibility curve as shown. Combination Production of ‘x’ Production of ‘y’ MOC/MRT A 0 16 — B 1 12 4 C 2 8 4 D 3 4 4 E 4 0 4 Y A 10 Straight line PP curve 8 Good ‘Y’ Constant MRT 6 4 2 0 B X 1 2 3 4 Good ‘X’ Economy and Central Problems of an Economy 17  7. With the death of lot of people, amount of combination is produced. If production of labour will fall and destruction of factories one good increases then less resouces will will cause a reduction in the stock of capital. be available for other goods, becasuse This decrease in resources causes a shift of resources are limited and have alternative production possibility curve to the left uses. showing less production of two goods than 11. MRT is the rate at which the units of one good before. have to be sacrified to produce one more unit of the other good in a two goods economy. Suppose an economy produced only two P Original PPC goods X and Y. Further suppose that by Good ‘Y’ P employing these resources fully and New PPC efficiently, the economy produced 1X + 10Y. If the economy decides to produce 2X, it has to cut down production of Y by 2 units. Then X 2Y is the opportunity cost of producing 1X. O Q Q Good ‘X’ Then 2Y : 1 is the MRT. 12. The central problem ‘How to Produce’ is the 8. The production possibility curve being problem of choosing the appropriate concave means that MRT increases as we technique of production for producing goods. move downward along the curve. MRT There can be more than one method for increases because it is assumed that no producing a good. More labour and less resource is equally efficient in production of capital (i.e., labour intensive technique) or all goods. As resources are transferred from more capital and lesss labour (i.e., capital one good to another, less and less efficient intensive technique) can be used for resources have to be employed. This raises cost and raises MRT. production of a good. Since resources are scarce, decision has to be taken about which 9. There are two properties of a production technque should be used on the basis of possibility curve. availability of resources. 1. Downward slopping: It is because as Example: A given quantity of cloth can be more quantity of one good is produced manufactured by combining factors of some quantity of the other good must be production in different proportions, making sacrificed as resources are scarce. More it capital-intensive or labour intensive of both goods cannot be produced. method. 2. Concave to the origin: It is because the marginal rate of transformation increases 13. Real level of production will be increased by as more of one good is produced. improvement. But potential level of 10. An economy can produce different possible production will not increase (No shifting of combinations of goods and services with PPC will take place). Reason being PPC is given resources. The problem is that, out of based on the assumption that available these different combinations, which resources are fully utilised. 18 Introductory Microeconomics Part-B PW 14. For whom to produce means that who will Since MRT is increasing, the PP curve is buy the goods and services produced. Clearly, downward slopping and concave to the those people who have income will be able origin. to buy. So, the problem amounts to how the 16. Floods have damaged and reduced resources. national income is distributed in an economy. Since potential production declines, the 15. production possibility frontier shifts to the Good X Good Y left. MRT (Units) (Units) 0 10 — 1 9 1Y : 1X 2 7 2Y : 1X 3 4 3Y : 1X 4 0 4Y : 1X CHAPTER SUMMARY & GLOSSARY ‰ The field of economics is typically necessity of making choices about resource categorized into two main branches: allocation. This central problem of an Microeconomics and Macroeconomics. economy encompasses determining what  Microeconomics focuses on analyzing goods to produce, how to produce them, and the behavior of individual economic for whom they should be produced. units, such as households and firms. It ‰ The production possibility frontier (PPF) or examines concepts like supply and curve illustrates all possible combinations of demand, consumer and producer two goods that an economy can produce equilibrium, pricing strategies, and given its available resources and technology, factor pricing. assuming full and efficient utilization of  Macroeconomics, on the other hand, resources. Shifts in the PPF occur due to studies the behavior of the economy as changes in resources or technology affecting a whole. It deals with broader concepts the production of both goods. such as national income, aggregate ‰ The root causes of economic challenges demand and supply, the general price can be attributed to several factors: level, and inflation. It is often referred to  Human Wants: The insatiable nature of as the theory of income and employment. human desires contributes to the perpetuation of economic issues. ‰ Economics itself is described as a system  Scarcity of Resources: Limited through which individuals seek to fulfill their wants by engaging in activities such as availability of economic resources poses production, consumption, investment, and a significant hurdle in fulfilling all wants exchange. and needs.  Alternative Resource Uses: The ‰ The fundamental economic problem arises multiplicity of potential uses for from the scarcity of resources relative to resources complicates decision-making unlimited human wants, leading to the processes. Economy and Central Problems of an Economy 19 ‰ At the core of an economy, there exist ‰ Additional concepts related to the PPC: three central predicaments:  Attainable Points: Points situated on or  Allocation of Production: Producers within the PPC, denoting feasible grapple with deciding what goods to production combinations. manufacture given resource constraints.  Unattainable Points: Situated beyond This necessitates choices regarding the the PPC, indicating production levels types and quantities of goods to produce. beyond current resource capabilities.  Efficiency: Points located precisely on  Production Methodology: Selecting the the PPC, showcasing optimal resource appropriate production techniques utilization. becomes imperative. This entails  Inefficiency: Points positioned inside weighing options such as labor-intensive the PPC, highlighting underutilization or versus capital-intensive methods. misallocation of resources.  Distribution of Goods: Distributing ‰ PPC shifts occur due to changes in resources produced goods and services presents a or technology affecting both goods, while challenge. Balancing the allocation rotations arise from alterations impacting among various segments of society only one good. involves considerations of profit ‰ Economy: A system facilitating the maximization for producers and social production and distribution of goods and welfare objectives set forth by services, enabling livelihoods. governments. ‰ Economics: A social science examining how ‰ Key features of the Production Possibility societies allocate limited resources with Curve (PPC) include: alternative uses to produce and distribute  Downward Sloping: Reflecting the goods and services among diverse groups. trade-off between producing different ‰ Economic Problem: The challenge of goods, where increasing one necessitates reconciling infinite human desires with finite sacrificing the other due to limited resources. resources. ‰ Microeconomics: The study of individual  Concave Shape: Demonstrating the economic units, such as consumer demand increasing Marginal Rate of and firm production. Transformation (MRT), meaning more ‰ Macroeconomics: The analysis of aggregate units of one commodity are foregone to economic phenomena like national income obtain additional units of another. and aggregate demand.  20 Introductory Microeconomics Part-B PW