Economics

Dr. Ranjul Rastogi

 Basic Economic Problems

Vast array of wants

Resources are limited
Scarcity
Problem of choice
How to use natural resources to maximize
Satisfaction
 Opportunity Cost & Rational Choice
If there is no increase in productive resources, increasing
production of a first good entails decreasing production of a
second, because resources must be transferred to the first
and away from the second.
Opportunity cost describe the trade-off between the goods.
The sacrifice in the production of the second good is called
the opportunity cost (because increasing production of the
first good entails losing the opportunity to produce some
amount of the second).
Opportunity cost is measured in the number of units of the
second good forgone for one or more units of the first good.
Weigh benefit and cost and opt for maximisation of benefit/
profit/ satisfaction is rational choice.
 What to produce
Rational Choice- weighing up the cost and
benefits of any activity
Opportunity Cost- the cost of next best
alternative foregone
What commodities should be produced?
How much of each of these commodities
should be produced?
 What to produce (contd.)
Choice between consumption goods or capital
goods
Choice between present goods or future
goods
Wartime good vs. peace time goods
Subject matter of micro economic theory-
theory of pricing (product and factor)
 How to produce
Which combination of resources to be used
for the production
Reduce loss and wastage
Labor vs. capital
Choice depends on cost of production
Cost depends on
- availability of resources
- price of factors of production
 For Whom to Produce
Known as problem of distribution
Distribution of income among various
members of society
Larger income means larger share of output
Income by doing some work or lending the
services of ones property
 Determination of the price of a factor
Functional distribution
Personal distribution
Personal distribution and inequality depends
upon
-price of the factor of production he owns
-amount of work he does
-how much property he owns
Theory of distribution
 Differences in wages and salaries
Skill
Productivity
Education
Bargaining power of various social classes
 Problem of Full Employment
Unemployment of Resources
involuntary Unemployment
Scarcity and idleness of resources co-exist
example-depression
Keynes theory of effective demand
Theory of national income
 Problem of Efficiency
Resources should be utilized efficiently
Efficiency in production-
production is said to be efficient if the resources are utilized
in such a manner that through any reallocation of resources
it is impossible to produce more of a good without reducing
the output of any other good.
Efficiency in distribution
Technical Efficiency
Economic Efficiency or allocative Efficiency
 Economic Growth
Increase in the capacity to produce goods over
a time-period
Increase in the national income
Need for a balanced growth
Growth vs. sustainable development
 Graphic Presentation of Basic
Economic Problems
Production Possibility Frontier/curve(PPF)
known as transformation curve also
PPF- is a graphic presentation of alternative
production possibilities facing an economy
PPC shows various combinations of two goods
or two classes of goods which the economy
can produce with a given amount of
resources.
 PPC- Assumptions
Two goods model
resources limited and capable of being put in
alternative uses
Fixed quantity of resources
Transformed or shifted
Used efficiently
full employment
Technology is constant
 TABLE

A GOOD (Guns) B Good (Butter)

Combinations

A 0 15
B 1 14
C 2 12
D 3 9
E 4 5

F 5 0
 Marginal Rate of Transformation

Marginal rate of transformation increases when transition is made from AA to

BB
 Shape of PPF
Slope increases as it moves from left to right
Marginal rate of transformation
Increasing opportunity cost
 Solutions
Capitalist Economy :Price mechanism, Free
market forces, Invisible hand
Socialist economy: Economic Planning
Mixed Economy: Consumers are free to choose
their line of production, at the same time state
keeps a watch on the activities; public and
private both