Basic problems of an economy

XI EconomicsChapter 3

Economic Problem Economic Problem: Scarcity is the fundamental problem of

every society Reason: None of us can have all that we

want Limited amount of human and non-human

resources It’s not possible for any economy to

produce every type of good in an unlimited quantity

Hence, every economy has to take the basic decision of making best use of its available resources in producing goods and services.

The Law of Scarcity

Why does economic problem arise? Unlimited Wants

Multiply over time Many wants recurring Wants differ in their urgency

Limited Resources Productive resources – scarce Labour – by size of population Land – by area of the country Capital & technology – scarcity of various

inputs Alternative Uses of Resources

Economizing of ResourcesThe available resources should be allocated among different uses in such a way that resources are put to their best possible use.

What is true of an individual is also true of an economy. Every economy, Capitalist or socialist Developed or underdeveloped

Basic or Central ProblemsWhat to produce and how much

to produce?How to produce?For whom to produce?Problems of fuller utilization of

resources.Problem of efficiency in utilization

of resources.Problem of economic growth

PPC and Central Problems

Possibilities

Butter(Million

kg)

Guns(Thousand

s)

Marginal Opp. Cost of Butter

(Thousand of Guns)

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

Draw Curve on given table

Prepare Schedule

Exercise

Conclude on your own

Conclude on your own

Assumptions of PPCThe amount of resources is fixed

Unchanged techniquesFull employment of resources

Resources are not equally efficient in the production of all commodities

CharacteristicsIt slopes downwards to right

It is concave from the origin

Central Problems on a PPCProblem of ScarcityProblem of ChoiceProblem of What to ProduceProblem of Full and Efficient utilization of the resources

Problem of Economic Growth

Economic Growth

It is generally defined as the process whereby real per capita income of a country increases over a long period of time

Focus three things,1. Rise in PCI2. Rise in PCI in real terms3. Long period

Economic Development

Traditionally, economic development has been defined as a sustained increase in real per capita income. (1960s and 1970s)

The process whereby the real PCI of a country increases over a long period of time, along with reduction of poverty, inequality and unemployment.

Growth Vs DevelopmentGrowth Development

Narrow Concept ComprehensiveMore O/P Composition of O/P,

Allocation of ResourcesRise in Income Also reduction of

poverty, inequality of income and employment

Defined strictly in terms of economic indicator, i.e., income

But also, non-economic indicators like literacy, health services, etc.

Growth Vs DevelopmentGrowth Development

Quantitative Also QualitativeEasier to realise More extensive. Involves

a whole lot of changes in the society

Developed countries Developing countriesLess government intervention required

Demands active involvement of the government

Stages of Economic Growth Prof. W. W. Rostow

1. Traditional Society2. Pre-take off stage3. Take-off stage4. Drive to Maturity5. The age of high mass-

consumption

1. Traditional Society

Absence of modern science and technology

Low output and productivityPrimitive methods of productionSufficient to meet the basic

consumption needsNo saving or investmentAgriculture is the mainstay

2. Pre-take off stage

Transitional era – pre-conditions for sustained growth are created

Aspiring for a higher standard of livingChanges occur in values, social attitude

and expectationsEducation and entrepreneurship spreadsTechnological revolution in agricultureExpansion of trade (internal & external)

3. Take-off Stage

Process of economic growth starts which becomes self sustained (without govt. action)

Initiated by a sharp stimulusLarge increase in the rate of saving

and investment – high rate of growth of o/p

Essential part – development of one or more leading sectors in the economy.

4. Drive to Maturity

Goal of high level of per capita o/p

Period of high, long sustained economic growth

Effective application of modern technology in all the sectors

Rate of investment is well high over 10 % of national income

5. The age of high mass-consumption

Final stage of economic growthPCI becomes very high, leading to

high standard of livingExtensive use of durable consumers’

goods and household gadgetsBalance of attention of the society is

shifted from problems of production to problems of consumption.