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Tuesday, July 2, 2013

Hseb Notes - Economics XI - Basic Economic Issues: Scarcity, Choice, Allocation of resources, Production possibility Curve (PPC)


Scarcity:
The scarcity of goods is the basic characteristics of economic world. This characteristic create economic problem. The economic goods and human resources are always scarce. Only the natural resources such as: air, water and sunlight are found in unlimited quantity. The economic goods should be distributed among the people due to scarcity.
The word scarcity is used in relative sense. All the means are scarce in relation to human wants. There is scarcity of productive resources such as land, labour, raw materials, machinery, equipments, etc. in the world. Therefore, it is impossible to produce all goods and services to satisfy all wants of the people.


Choice:
Resources have alternative uses. For Eg: A plot of land can be used either for producing paddy or wheat or vegetables or fruits, etc. So, choice is necessary due to scarcity of resources. All the resources are limited compare to demand. Therefore, the society must have to choose which commodity is to produce and which commodity is to sacrifice. Hence, the problem of choice arises.
People have to make choice while spending their income. They have to think how much to spend and how much to save out of their income. Similarly, it is also necessary to decide how much to spend on food, how much on dress and how much recreation. In this way, choice is the basic economic problem.

Allocation of resources:
Resources are scarce and have alternative uses. Therefore, allocation of resources is the central economic problem. Here, allocation of resources means distribution of resources in the economy. In a free market economy, the scarce economic resources are allocated in the following ways:
  • Determining what will be produced:
The first resource allocation function is to decide what goods and services will be produced. It is because resources are scarce.

  • Determining how it will be produced:
The second allocation function is to decide how goods and services will be produced. It is because there are different ways of producing a product.

  • Determining whom to produced:
This third function is to decide who will get the goods and services which are produced. It is because economic resources are scarce.
In a free market economy, allocation of resources is determined by price mechanism through demand and supply of resources.

Production Possibility Curve(PPC):
            The production possibility curve is a tool used to explain the problem of scarcity and choice. A curve which shows the production possibilities that can be produced with given resources and technology is called production possibility curve. This curve is also called production fontire or production transformation curve. According to David Begg: “The production possibility curve shows maximum combination of output that the economy can produced using all available resources.”

Assumptions:
            The PPC curve is based on the following assumptions:
I.                   Only two goods are produced in the economy that is x and y.
II.                There is full employment of resources.
III.             The supply of factors are fixed.
IV.             The time period is short.
V.                The production techniques is given and constant.
The concept of production possibility curve is shown in the following table and diagram.

Combinations
Productions of x
(Capital goods)
Production of y
(Consumer goods)
A
0
15
B
1
14
C
2
12
D
3
9
E
4
5
F
5
0

This table shows the production possibilities of x and y goods that can be produced with given resources. If all available resources are used for the production of y goods, the economy can produce 15 units of y and 0 units of x. Similarly if all available resources are used in the production of x goods, the economy can produce 5 units of x and 0 units of y. These two are extreme points in between these there are various other possibilities.


            In this diagram, AF is the PPC curve. The economy can produced any combination lying on this curve i.e. A, B, C, D, E & F. The point H lying above the curve cannot be obtained because of scarcity of resources. Similarly, the point G inside the curve is inefficient because the resources are unutilized. The economic cannot produce either inside or outside the PPC curve. Therefore, it is called production possibility frontire.

Shift in Production Possibility Curve:
I.                   Upward shift in PPC:
If there is increase in production capacity in the economy the PPC Curve shifts upward to the right. The increase in the size of working population, increase in the labour productivity and technology progress shift PPC Curve upward. This can be shown in the following diagram:
            In this diagram, AF is the initial PPC curve. Now, with the increase in labour force, labour production & introducation of new technology increases the productive capacity of the economy.

II.                Downward shift in PPC:
If there is decrease in productive capacity in the economy the PPC curve shift downward to the left. The decrease in the size of working population decrease in labour productivity and depletion of natural resources shift PPC curve downward. This can be shown in the following diagram.

            In this diagram, AF is the original production possibility curve due to the decrease in productive capacity of economy because of decrease in labour force, decrease in labour productivity and depletion of natural resources .

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