Trickonomics With Abhilasha

SCARCITY DEFINITION OF ECONOMICS BY ROBBINS: ECONOMIC PROBLEM Preview 29:14

Economic problem is the problem of choice. The problem of choice has to be faced by every economy of the world, whether developed or developing. Human beings have wants which are unlimited. When these wants get satisfied, new wants crop up. Human wants multiply at a fast rate. The economic resources to satisfy these unlimited wants are limited. In other words, resources or factors of production (they are defined as goods and services needed to carry out production i.e., land, labour, capital and entrepreneurship) are scarce. They are available in limited quantities in relation to the demand. Resources are not only scarce but they also have alternative uses. All this necessitates a choice between which goods and services to produce first. The economy comprising of individuals, business firms, and societies must make this choice. According to Prof. Robbins, “the economic problem is the problem of choice or the problem of economising, i.e., it is the problem of fuller and efficient utilisation of the limited resources to satisfy maximum number of wants. The scarcity of resources creates this situation.” If an economy employs more resources to produce good X, then it will have to forego the production of good Y. Hence, economy has to choose which of the two goods X or Y will give more satisfaction. An economy can produce both wheat and rice on the same plot of land. The decision to produce wheat is an outcome of choice.

Causes of Economic Problems:

1. Human Wants are Unlimited. Human beings have wants which are unlimited. Human want to consume more of better goods and services has always been increasing. For example, the housing need has risen from a small house to a luxury house, the need for means of transportation has gone up from scooters to cars, etc. Human wants are endless. They keep on increasing with rise in people's ability to satisfy them. They are attributed to (i) people’s desire to raise their standard of living, comforts and efficiency; (ii) human tendency to accumulate things beyond their present need, (iii) multiplicative nature of some wants e.g. buying a car creates want for many other things - petrol, driver, car parking place, safety locks, spare parts, insurance, etc. (iv) basic needs for food, water and clothing, (v) influence of advertisements in modern times create new kinds of wants and demonstration effect. Due to these reasons human wants continue to increase endlessly. While some wants have to be satisfied as and when they arise such as food, clothes, shelter, water, etc., some can be postponed e.g. purchase of a luxury car. The priority of wants varies from person to person and from time to time for the same person. Therefore, the question arises as to ‘which want to satisfy first’ and ‘which the last’. Thus, consumers have to make the choice as to ‘what to consume’ and ‘how much to consume’.

2. Resources are Limited. Scarcity of resources is the root cause of all economic problems. All resources that are available to the people at any point of time for satisfying their wants are scarce and limited. Conceptually, anything which is available and can be used to satisfy human wants and desire is a resource. In economics, however, resources that are available to individuals, households, firms and society at any point of time are traditionally natural resources (land). Human resources (labour), capital resources (like machine, building, etc.) and entrepreneurship are scarce. Resource scarcity is a relative term. It implies that resources are scarce in relation to the demand for resources. The scarcity of resources is the mother of all economic problems. It forces people to make choices.

3. Resources have Alternative Uses. Resources are not only scarce in supply but they have alternative uses. Same resources cannot be used for more than one purpose at a time. For example,Rs 100 can be put in various alternative purposes such as buying petrol, notebook, ice-cream, burger, cold drink, etc. Similarly an area of land can be used for farming or as a playground or for constructing school, college or hospital building or for constructing residential building, etc. But return on the area of a land or utility of putting ` 100 in various uses varies according to the use of the concerned resources. Thus, people have to make choice between alternating uses of the resources. If the area of land is put to a particular use, the landlord has to forgo the return expected from its other alternative uses. This is termed as opportunity cost. Economics as a social science analyses how people (individuals and the whole society or economy) make their choices between economic goals they want to achieve, between goods and services they want to produce and between alternative uses of their resources which will maximise their gains.

DIFFERENCE BETWEEN POSITIVE AND NORMATIVE & MICRO AND MACRO ECONOMICS Preview 30:42

CENTRAL PROBLEMS OF AN ECONOMY Preview 23:30

CENTRAL PROBLEMS OF AN ECONOMY

Economic Problems of an Economy Economic problems are reflected in the form of Central or Basic Problems of an economy. Any economy—whether market, centrally planned, or mixed—has to face these problems. According to Samuelson, there are three fundamental and interdependent problems in an economic organisation—what, how and for whom—which are grouped under allocation of resources. Allocation of resources means how much of each resource is devoted to the production of goods and services.

1. Allocation of Resources :

(a) What Goods to Produce and How Much to Produce?

Due to limited resources, every economy has to decide what goods to produce and in what quantities. If the means were unlimited, then it would lead to a stage of salvation. But the means are limited and the economy must decide the efficient allocation of scarce resources so that both output and output-mix are optimum. An economy has to make a choice of the wants which are important for the economy as a whole. For example, if the economy decides to produce more cloth, it is bound to reduce the production of food. The reason is that resources used to produce food and cloth are limited and given. An economy cannot produce more of both food and cloth. Thus, an economy has to decide what goods it would produce on the basis of availability of technology, cost of production, cost of supplying and demand for the commodity.

(b) How to Produce?

It is the question of choice of technique of production. Since resources are scarce, an inefficient technique of production, which would lead to wastage and high cost, cannot be applied. A technique of production which would maximize output or minimize cost should be used. We generally consider two types of techniques of production: labor-intensive and capital-intensive techniques. In labor-intensive technique, more labor and less capital is used. In capital-intensive technique, more capital and less labor is used. For example, it is always technically possible to produce a given amount of wheat or rice with more of labor and less of capital (i.e. with labor intensive technology) or with more of capital and less of labor (i.e. with capital intensive technology). The same is true for most commodities. In the case of some commodities however, choices are limited. For example, production of woolen carpets and other items of handicrafts is by nature labor intensive, while production of cars, TV sets, computers, aircraft, etc., is capital intensive. In most commodities, however, alternative technology may be available. Alternative techniques of production involve varying costs. Therefore, the problem of choice of technology arises. The guiding principle of this problem is to adopt such technique of production which has least cost to produce per unit of the commodity. At macro level the most efficient technique is the one which uses least quantity of scarce resources. Hence, producers must always produce efficiently by using the most efficient technology. Thus, every economy has to choose the most efficient technique of producing a commodity.

c) For Whom to Produce?

This is the question of how to distribute the product among the various sections of the society. National product is the total output generated by the firms. Goods and services are produced in the economy for those who have the ability (i.e. capacity) to buy them.Ability or capacity or purchasing power of people depends on their income. More income means more capacity to buy. The total output ultimately flows to the households in the form of income, i.e., their wages, rent, profits or interest. There are millions of people in a society. Each one cannot get sufficient income to satisfy all his wants. This raises the problem of distribution of national product among different households. Who should get how much is thus the problem? Thus, guiding principle of this problem is output of the economy be distributed among different sections of the society in such a way that all of them get a minimum level of consumption.

OPPORTUNITY COST AND MARGINAL OPPORTUNITY COST Preview 49:09

OPPORTUNITY COST:

In economic analysis, the concept of opportunity cost is widely used. Opportunity cost is defined as the cost of alternative opportunity given up or surrendered. For example, on a piece of land both wheat and sugarcane can be grown with the same resources. If wheat is grown then opportunity cost of producing wheat is the quantity of sugarcane given up. It is clear that question of opportunity cost arises whenever resources have alternative uses. These resources are not always physical resources, they may be monetary resources or time. For example, the opportunity cost of spending in a restaurant, may be a book that you could have purchased by spending the same amount. Also, opportunity cost of time devoted to studies, effort or work is the leisure or play that could have been enjoyed. In terms of production possibility curve, the slope of the curve at every point measures the opportunity cost of producing more units of good X in terms of good Y given up.

Marginal Opportunity Cost:

Production possibility curve is also called transformation curve because looking at it, it appears as if one good is being transformed into another. A movement along PPC implies that more of good X is produced by sacrificing the production of a certain amount of good Y. PPC is also called opportunity cost curve because slope of the curve at each and every point measures opportunity cost of one commodity in terms of alternative commodity given up. The rate of this sacrifice is called the Marginal Opportunity Cost. Marginal Rate of Transformation (MRT). It is defined as the ratio of number of units of good sacrificed to produce one additional unit of other good. MRT measures the slope of PP curve. MRT = slope of PPC. Actually MRT is the rate at which the transfer of resources from production of one good to production of other good takes place. Shape of PP curve depends upon the MRT or MOC.

PRODUCTION POSSIBILITY CURVE Preview 41:48

Production Possibility Set and Curve:

Production possibility set refers to different possible combinations of two goods that can be produced from a given amount of resources and a given level of technology. Production possibility curve or frontier (PPF) shows the various alternative combinations of goods and services that an economy can produce when the resources are all fully and efficiently employed. PPC shows the obtainable options. There is a maximum limit to the amount of goods and services which an economy can produce with the given resources and the state of technology. The resources can be used to produce various alternative goods which are called production possibilities and the curve showing the different production possibilities is called production possibility curve.

Assumptions:

Assumptions underlying production possibility curve are:

(a) Economy produces only two goods, X and Y. (Examples of goods X and Y can be gun and butter, wheat and sugar cane, cricket bats and tennis rackets or anything else.)

(b) Amount of resources available in an economy are given and fixed.

(c) Resources are not specific, i.e., they can be shifted from the production of one good to the other good.

(d ) Resources are fully employed, i.e., there is no wastage of resources. Resources are not lying idle.

(e) State of technology in an economy is given and remains unchanged.

(f ) Resources are efficiently employed (efficiency in production means output per unit of an input).

Production Possibility Schedule

Production Possibility schedule refers to tabular presentation of different possible combinations of two goods that an economy can produce with given resources and available technology.

Features of Production Possibility Curve:

(a) PPC slopes downward. A production possibility curve slopes downward from left to right because under the condition of full employment of resources, production of one good can be increased only after sacrificing production of some quantity of the other good. It is so because resources are scarce. Due to this, production of both goods cannot be increased at the same time. That is why PPC slopes downward.

(b) PPC is concave to the origin. A production possibility curve is concave to the point of origin because of increasing marginal rate of transformation (MRT) or increasing marginal opportunity cost (MOC). Slope of PPC is defined as the quantity of good Y given up in exchange for additional unit of good X.Marginal opportunity cost is opportunity cost of good X gained in terms of good Y given up. It is also called Marginal Rate of Transformation (MRT). Concave shape of PPC means that slope of PPC increase which implies that MRT increases. It means that for producing an additional unit of a good, sacrifice of units of other good (i.e. opportunity cost) goes on increasing. It is because resources are not equally efficient for the production of both goods. Thus, if resources are transferred from production of one good to another, cost increases i.e., MRT or MOC increases. It is called law of increasing opportunity cost.

Shifts in Production Possibility Curve:

With discovery of new stock of resources or an advancement in technology, the productive capacity of an economy increases. The economy can produce more good X or more good Y or more of both goods. The effect of economic growth on the production possibility curve to a country is illustrated in Fig. 1.5, Fig. 1.6 and Fig. 1.7. PPC will shift to the right when: (a) New stock of resources are discovered. (b) There is an advancement in technology. For example: Government policy of ‘Make in India’.

LECTURE 5: Summary of the Course & Practice Assignments Preview 05:55