INTRODUCTON OF ECONOMICS

(Marks allotted – 4)

Chapter Scheme
❖ Scarcity
❖ Economic Problem
❖ Economy and its Central Problems
❖ Opportunity Cost
❖ Production Possibility Curve

Definition of economics
Robbins definition-
“Economics is a science which studies human behaviour as a relationship between ends [goals,
wants] and scarce means which have alternative uses”

Scarcity definition
Scarcity of resources means limited availability of resources in relation to demand

Resources available for satisfaction of wants < Resources required for satisfaction of wants
So all wants are never satisfied

Economizing the resources

Economizing the resources means making best possible use of available resource

Basic economic problems

Economic problem is the problem of unlimited wants, limited resources and the alternative
use of limited resources
They arise because of-
1) Unlimited wants for goods and services
2) Limited resources when compared to unlimited wants
3) Alternative uses of limited resources
4) Problem of choice

[Question – What is an economic problem? Why do they arise?]

Central problems of an economy

Every economy faces three central problems. These are -

1) Problem of allocation of resources
a) What to produce and what quantity
b) How to produce
c) For whom to produce
 2) Problem of efficiency and fuller employment of resources
3) Problem of growth

(Question: what are the problems of allocation of resources?)

1) Problem of allocation of resources

a) What to produce and what quantity:

It is the problem of choosing the different items of goods and the quantities to produce with the
available resources.

Every economy has limited resources. Therefore, it cannot produce all the goods. Accordingly, it
has to choose between different goods and services. So every economy has to decide what goods
and services should be produced and in what quantity. Economy has to decide which wants are to
be taken on priority and which ones can wait. It involves two fold decisions-

i) The economy has to decide what goods and services are to be produced. For e.g.
which of the consumer goods like sugar, cloth, wheat etc. are to be produced and which
of the capital goods like machines, tractors etc. are to be produced.
ii) When an economy has taken a decision as to what goods or services are to be produced,
then it has to decide about its quantity i.e. how much of consumer goods and how
much of capital goods are to be produced. For e.g. if an economy decides to produce
more of wheat and cloth within a given period of time, then it will have to produce less
of machines due to the limited resources available.

(Question: Explain the central problem of “what” with examples)

b) How to produce:

This problem relates to the choice of technique i.e. labor intensive or capital intensive.

For e.g. Production of cloth is possible either by handloom or by the use of modern machines. In
labor intensive technique, proportion of labor is more and capital is less. In capital intensive
technique, proportion of capital is more and labor is less.

An economy should adopt that technique which gives efficient production at minimum cost and
best use of scarce resources. Developed countries use capital intensive techniques and developing
countries use labor intensive techniques.

(Question: Explain the central problem of “how” with examples)

c) For whom to produce:

This is the problem of distribution of final goods and services.

i)Interpersonal distribution of income: It is the problem of deciding whether to produce for low
income group or high income group.It depends on the level and distribution of income and
wealth.
ii)Factoral distribution of income:It is the problem of deciding how ouput/income is to be
distributed among factors of production such as land, labour, capital and organization. The total
output/income is distributed among these factors of production in the form of wage, rent, interest
and profit.
Thus the problem of distribution of goods and services or the distribution of production implies
the problem of distribution of income.

(Question: Explain the central problem of “for whom” to produce)

2) Problem of efficiency and fuller employment of resources:

Problem of efficiency means if any alternative reallocation of resources cannot increase the
production of any commodity even by one unit, the existing allocation of resources in production
may be considered efficient.

Problem of fuller utilization of resources is that the resources which are scarce should not
remain unutilized or underutilized.

3) Problem of growth:

Problem of growth of resources is to increase the production in an economy. Growth can take
place in the following manner-

a) by finding new market

b) by new technology
c) by modifying the existing produce
d) by finding new source of energy

Solving the central problems-

1) In a capitalist economy- they are solved by price mechanism. Price mechanism works
through the forces of demand and supply in the market. Profit is the main source.
2) In a socialist economy- they are solved by the government
3) In a mixed economy- it is the joint responsibility of price mechanism and the planning
process by the government.

PRODUCTION POSSIBILITY CURVE (PPC)

PP curve is a graphical representation which shows the various combinations of 2 goods that
an economy can produce with the available technology and given resources which are fully
and efficiently employed.

It is also called production possibility boundary or production possibility frontier because it

shows the limit of what is possible to produce with present resources.

This curve is also called transformation line or transformation curve because it indicates that
if more of good X is to be produced then factors will have to be withdrawn from the production of
good Y and transferred to the production of good X. In other words, good Y is transformed into
good X.

Assumptions:

The PP curve shows the various production possibilities. It is based on the following assumptions.

1) the resources available are fixed

2) technology remains unchanged
3) resources are fully employed
4) resources are efficiently employed
5) resources are not equally efficient in production of all products. Thus, if resources are
transferred from the production of one good to another, the cost increases. In other words,
marginal opportunity cost increases.

PPC can be explained with the help of the following table and diagram:

Possibilities Wheat (in million Guns (in MOC for wheat

kgs) thousands)
A 0 20 -
B 1 18 2 (20 – 18) 2G:1W
C 2 15 3 (18 – 15) 3G:1W
D 3 11 4 (15 – 11)4G:1W
E 4 6 5 (11 – 6) 5G:1W
F 5 0 6 ( 6 – 0) 6G:1W

Let us assume that an economy decides to produce only two goods i.e. wheat and guns with its
available resources and given technology. If all the resources are used for the production of wheat
alone then 5 million kgs of wheat can be produced. On the contrary, if all the resources are used
for the production of guns alone then, 20,000 guns can be produced. If the economy produces both
the goods, then various combinations of 2 goods can be produced. The above table shows the
various possibilities of production of wheat and guns. It is called production possibility schedule.

Diagram
PP curve is downward sloping because more production of one good is associated with less
production of the other.

PPC is concave because marginal opportunity cost keeps on increasing

MOC increases because
i) Resources are not equally efficient in production of both the goods
ii) Later less efficient resources get transferred in production of the other good

If there is unemployment or resources work inefficiently then the economy will operate within
the PPC for e.g. at point U

Economy cannot operate at any point outside of PPC for e.g. at point G. this point represents
unattainable combination of output.

Marginal Opportunity cost / Marginal rate of transformation and PPC-

Opportunity cost means opportunity lost. What is given up for getting something is called the
opportunity cost of that thing. For e.g. a consumer has to forego three cups of tea for getting one
glass of orange juice then the opportunity cost of one glass of juice will be three cups of tea. Thus,
opportunity cost of any commodity is the amount of other good which has been given up in order
to produce that commodity. In general terms opportunity cost of a given activity is the value of the
next best activity. It is equal to the value of the next best alternative. Opportunity cost refers to
the value of a factor in its next best alternative use.

PP curve is a graphical representation which shows the various combinations of 2 goods that
an economy can produce with the available technology and given resources which are fully
and efficiently employed.

The PPC is based on the concept of opportunity cost. An economy must give up something of one
good (e.g. guns) to get more of the other good (e.g. wheat). What is given up for getting something
is called the opportunity cost of that thing.
In Economics marginal means additional (or extra). Thus, marginal opportunity cost of a
particular good along PP curve is the number of units sacrificed to produce one more unit of
another product. It can be explained with the help of the following table:

Possibilities Wheat (in million Guns (in MOC for wheat

kgs) thousands)
A 0 20 -
B 1 18 2 (20 – 18) 2G: 1W
C 2 15 3 (18 – 15) 3G: 1W
D 3 11 4 (15 – 11) 4G: 1W
E 4 6 5 (11 – 6) 5G: 1W
F 5 0 6 ( 6 – 0) 6G: 1W

As production of wheat is increased its MOC in terms of guns goes on increasing. For e.g. when
economy moves from production possibility A to B it sacrifices 2000 guns to produce 1 million
Kg of wheat. Thus, MOC for 1 million Kg of wheat is 2000 guns. Similarly, in combination C
3000 guns are given up to produce 1 million Kg of additional wheat i.e. MOC of 1 million Kg of
wheat is now 3000 guns. Likewise in combination D, E and F MOC of producing 1 lakh Kg of
additional wheat is increasing in terms of guns.

The slope of PPC = MOC

As a result, PPC is concave to the origin. PPC is concave because marginal opportunity cost
keeps on increasing. If MOC were constant, PPC will be straight line.

MOC / MRT rises because

i) Resources are not equally efficient in production of both the goods
ii) Later less efficient resources get transferred in production of the other good

(Question: why is PPC concave? When can it be a straight line?)

===============================================================MRT is
the ratio of units of 1 good sacrificed to produce one more unit of the other good.

MRT = Units of 1 good sacrificed = ∆ Guns

More units of the other good produced ∆ Wheat

MRT is the rate at which the quantity of output of one good is sacrificed to produce one
more unit of the other good.

===============================================================
Two basic properties of PPC
1) PPC slopes downwards- PPC slopes downwards from left to right. It is because more of good
X can be produced only with less of good Y. Production of both the goods cannot be increased
simultaneously.
2) PPC is concave to the origin- it is because with the production of each additional unit of good
X, more and more units of good Y will have to be sacrificed. Opportunity cost of producing every
additional unit of good X tends to increase in terms of the loss of production of good Y.

Marginal Opportunity cost keeps increasing because –

i) Resources are not equally efficient in production of both the goods
ii) Later less efficient resources get transferred in production of the other good

Shift of PPC-

Diagram

Shifting of PP curve to P1 P1 indicates economic growth. If technologies progress or if

resource available to an economy grow, then the economy can produce more of both the
goods and can shift to the right.

More labor, more capital goods, better technology, all mean more production of both the goods.
This will shift the PP curve to the right.

Diagram
PP curve can also shift to the left if resources decrease. It is a rare possibility. It may happen due
to fall in population, destruction of capital caused by large scale natural calamities, wars etc.

Distinguish between Micro and Macro Economics

Micro Economics Macro Economics

1) Study of individual items 1) Study of aggregates/ economy as a
whole
2) demand and supply are the main tools 2) Aggregate demand and aggregate supply
of analysis are the main tools of analysis
3) It explains about resource allocation 3) It explains further utilization of
and what and how to produce resources and how productive capacity and
national income of the country increase
over a period of time
4) It studies the central problems of 4) It studies the central problems of the
individual production units and price entire economy and the determination of
determination income, output and employment of the
economy.

POSITIVE AND NORMATIVE ECONOMICS

Basis of Difference Positive Economics Normative Economics

1) Meaning It is a body of systematized It is a body of systematized
knowledge relating to what knowledge relating to what
is, what was and what will ought to be and what ought
be. to have been.
2) Examples a) India is an overpopulated a) Population growth should be
country controlled in India
b) The rate of inflation in India b) The rate of inflation should
is 6% not be more than 6%
c) There is inequality of c) Income distribution should
income in our country be equal in our country
 FEATURES OF THE THREE ECONOMIC SYSTEMS

Features Market Economy Centrally Planned Mixed Economy

Economy
1) Meaning Market economy is A centrally planned Mixed economy is
a free economy in economy is one in one in which
which producers which major production,
and consumers are decisions relating consumption and
free to take their to production, investment
production and consumption and decisions are by
consumption investment are and large left to the
decisions according taken by some free play of the
to the prices central authority marker forces but
prevailing in the or by the economic
market. Economic government. activities are
activities are left to Maximization of regulated and
the free play of the social welfare is motivated by the
market forces. the key objective. government, so
Producers are free that social welfare
to produce those is also maximized
goods and services along with
which are high in individual
demand so that they welfare.
are able to
maximize their
profits. Likewise
consumers are free
to buy goods and
services according
to their choices so
that they are able to
maximize their
satisfaction.
2) Examples USA, UK, etc. China, former India
USSR

Q1) How does scarcity and problem of choice go hand in hand?

Resources are scarce and wants are unlimited therefore the question of choice arises. Economy has
to decide which wants are to be taken on priority and which ones can wait. For satisfaction of
wants resources should be allocated. Thus scarcity and choice go together. If resources were
available in abundance, then there would be no problem of choice. Due to scarcity of resources in
relation to our unlimited wants we have to make a choice of allocating scarce resources among
production of different goods and services to achieve maximum possible satisfaction of wants.
Thus problem of choice arises due to unlimited wants, scarce resources and alternative uses
of scarce resources

Q2) What do you mean by economizing the resources?

Economizing the resources means making best possible use of available resource

Q3) What does movement from a point within the PPC to a point on the PPC indicate?

It indicates that all resources are fully and efficiently employed.

Q4) Does massive unemployment shift PPC to the left?

No it will not shift PPC to the left. PPC is constructed on the assumption that the available
resources in the economy are fully and efficiently utilized. Massive unemployment is a situation
where resources are not fully utilized. It is a situation of underutilization of resources. In case of
massive unemployment the economy will not operate on the PPC but from a point within the PPC.

Q5) Can an economy only be on PPC / Does production take place only on PPC?

1) If resources are fully and efficiently employed then an economy will be on the PPC
2) If resources are unutilized / underutilized /inefficiently utilized then the economy will
operate from within the PPC.

Q6) What is economics all about?

Economics is about making choices in the presence of scarcity.

Q7) Why does MOC increase along a PPC? / Under what circumstances does MOC
increase?

If more and more of one good are produced, factors producing it become marginally less and
less productive. Less efficient factors are now transferred for the production of that good.
It means ∆ loss of Y tends to increase as more and more resources are
---------------
∆gain of X

shifted from Y to X. Increasing application of resources in X would mean less and less of
additional output of X and increasing withdrawal of resources from Y would mean more and
more of additional loss of Y.

Q 8) The government has started promoting foreign capital. What is its economic value in
the context of Production Possibilities Frontier?
It will increase inflow of foreign capital. Its economic value is the rise in production potential due
to increase in resources.
Consequently PPC will shift to the right

Q9) Unemployment is reduced due to measures taken by the government. State its economic
value in the context of Production Possibilities Frontier?

The economic value of reduction in unemployment is that it will help the economy in realizing its
production potential. If the economy is working from within the PPC it will move closer to the
PPC or start working on the PPC

Q10) Large numbers of technical training institutions have been started by the government.
State its economic value in the context of Production Possibilities Frontier?

This would lead to technical innovations in the economy. With the improvement of technology,
PPC will shift to the right
If the economy is working within the PPC then due to better utilization of resources it will move
closer to the PPC or will start working on the PPC
Q11. What will be the impact of recently launched “Clean India Mission” (Swachh Bharat
Mission) on the production possibility curve of the economy and why?

Ans. PPC is a graphical representation which shows the various combination of 2 goods that an
economy can produce with the available technology and given resources fully and efficiently
employed.
The “Clean India Mission” (Swachh Bharat Mission) will lead to better waste management
technique. Consequently it leads to healthy India and increased individual productivity. Both
these factors will lead to better and efficient utilization of existing resources of an economy.
Accordingly, the economy will move higher and closer to PPC. This movement is being depicted
in the below graph with the help of the arrow from point P.

Q12. What is likely to be the impact of “Make in India” appeal to the foreign investors by
the Prime Minister of India, on the PPF of India? Explain.

Ans.”make in India” appealby the Prime minister of India is an initiativeto encourage the foreign
producers to lauch their production establishment in India. “Make in India” campaign focuses on
the inflow of foreign capital (FDI) in the domestic economy. It would increase the availability of
resources in the domestic country in the form of investments along with availability of high-end
technology. Accordingly, PPF would shift to the right.

Q13. What will be the impact of “Education for All Campaign” (Sarv Shiksha Abhiyan) on
the production possibility curve of Indian economy and why?

Ans. “Education for All Campaign” (Sarv Shiksha Abhiyan) is expected to improve the quality
of labor force in the economy. Therefore, the point which was earlier below the PPC (indicating
underutilization of resources) will move close to or on the PPC (indicating better and efficient
utilization of resources.
Q14.Union health minister of India has recently launched ‘Mission Indradhanush’:Full
immunization of all children by 2020.State its impact on production possibility curve of the
economy.
Ans.Immunization for all children would ensure the emergence of robust labour force in the
country. When the robust labour force is added to the existing stock of manpower, resource-pool
of the country is expected to rise in the long run. Thus PPC will shift to the right in the long run.
Q15. Explain problem of ‘What to produce’ with the help of PPC.

Ans.
What to produce is a problem of choice – which goods to produce and in what quantity
More of capital goods will lead to less production of consumer goods and vice versa
Diagram

All points on PPC shows what to produce and how much to produce.
AF is the PPC it brings out 3 facts:
1. Economy can produce two goods(consumer good and capital good).Problem of what to
produce is the problem of choosing between the points on the PPC.
2.More production of consumer good(wheat) implies less production of capital good(guns)-PPC
is downward sloping
3. As more and more of resources are shifted from production of guns to production of wheat.
This implies that, since MOC increases-PPC becomes concave to the
origin.(nj/jp>hk/kn).Accordingly the problem of choice tends to become serious as resources are
shifted from one to the other.

ONE MARK QUESTIONS

1 Why does the problem of choice arise
2 Give 2 examples of micro economic studies.
OR
Give 2 examples of micro economic variables
3 Why does an economic problem arise?
OR
State 2 causes of an economic problem
4 Define opportunity cost
OR
Give the meaning of opportunity cost.
5 What does a rightward shift of PPC indicate?
6 Define micro economics
7 Define marginal opportunity cost
8 Why is the PPC concave?
9 State 2 characteristics of resources which giver rise to economic problem
10 Give one reason for a rightward shift in the PPC
11 What does the problem of for whom to produce refer to?
12 When is the fuller utilization of resources said to have taken place?
13 When is allocation of resources in an economy considered to be efficient?
14 Give 2 examples each of underutilization of resources and 2 examples of growth of
resources.
15 Define PPC
16 What gives rise to central problems of an economy?
17 Define MOC along a PPC.
18 What is meant by scarcity of resources?
19 Why is there a need for economizing resources?
20 When would there be no economic problem?
21 Define the term scarcity as used in economics
22 What is meant by economizing of resources?
23 Define economic problem
24 What do you mean by allocation of resources?
25 What is the reason behind the operation of law of increasing MOC?
26 What does the slope of PPC show?
27 If there is underutilization of resources how is it indicated in a PPC?
28 Why do technological advancement or growth of resources shift the PPC to the
right?
29 Name the branch of economics which deals with the behaviour of individual units of
an economy.
30 What does movement from one point to another along a PPC show?
OR
What does a movement along the PPC indicate?
31 Why is PPC downward sloping from left to right?
32 A doctor has a private clinic in New Delhi and is getting Rs.10 lakhs per year. If he
works in a government hospital in New Delhi his annual earnings are Rs 8 lakhs.
What is the opportunity cost of having a clinic in New Delhi?
33 An economy always produces on the PPC. Do you agree?
34 Can we solve our central problems once for all by increasing resources?
35 Should massive unemployment shift PPC to the left?
36 Why does PPC show increasing slope?
37 What is the other name of PPC?
38 Why is the Production Possibility curve called the transformation curve?
39 Give the formula for Marginal rate of transformation.
40 When is the PPC a straight line?
Three/ four marks questions.
1 What does the PPC show? Explain it with the help of a schedule and a diagram
2 What are the three central problems of an economy? Why do they arise?
3 Explain the problem of what to produce with the help of production possibility curve
4 Explain the problem of For whom to produce.
5 Explain the problem of how to produce with the help of PPC?
6 Draw a PPC. What does a point below this curve indicate? Explain.
7 Why is the PPC concave to the origin?
8 Explain how scarcity and choice go together.
9 Explain the concept of opportunity cost with the help of an example.
10 An economy produces two goods T shirts and cell phones. The following table shows
its production possibilities. Calculate the MOC of T shirts at various combinations
T shirts Cell Phones (In thousands)
0 90,000
1 80,000
 2 68,000
3 52,000
4 34,000
5 10,000
11 If PPC relates to wheat and corn (on the X axis and Y axis respectively) draw
diagram showing change in PPC when resources remain constant and technology
only improves for wheat.
12 What are the characteristics or properties of PPC? Explain.
1) Production in an economy is below its potential due to unemployment.
Government starts employment generation schemes. Explain its effect using
PPC.
2) Explain the meaning of opportunity cost with the help of production
possibility schedule.
3) With the help of a suitable example explain the problem of ‘for whom to
produce’.
4) Unemployment is reduced due to the measures taken by the government.
State its economic value in the context of production possibility frontier.
5) The government has started promoting foreign capital what is its economic
value in the context of production possibility frontier.
6) Why does an economic problem arise? Explain.