Grade 11 Economics Note

Basic Economics Issues

Introduction

Before going on the topic of basic economic issue facing every society, we have to know what an economy is. An economy is nothing except the sum of all economic activities like production, consumption, exchange and distribution. If an economy is the sum of all economic activities, then it should also include those institutions through which all these economic activities become possible. Hence, it includes Households, firms, government, external sector which are known as economic units. Thus, an economy consists of economic units who perform economic activities to fulfill economic wants. Economy includes people and institutions and the set of intricate interrelationship between them. Economies are different from each other on different respects like size, rich, poor, complex, simple etc.

Economic system is the platform which defines the role of every economic unit in the economy. An economic system determines the scope of activities that an economic unit can perform. Economic system are of various types. They are as follows.

Market economic system: The market economic system assumes no intervention of the government in the allocation of resources or economic activities. The allocation of resources are done by the forces of demand and supply or the market forces.

Planned economic system: There is no freedom in the allocation of resources in this type of economic system. All the resources are controlled by the government and their allocation is the decision of the government.

Mixed economic system: This economic system assumes the role of both the government and the private sector. Some economic activities are controlled by the government while other activities are left to the private sector.

 

Concept of scarcity

The economic problem or the problem of scarcity was first introduced by professor Lionel Robbins in his modern definition of economics also known as the definition of scarcity.  Human wants are limitless. Be it an individual, a community or a country, everyone is faced with the problem of scarcity.  A person has unlimited desires. He might want to eat a pizza, buy a car, buy a house, go to cinema etc.  Likewise a country might have unlimited desires like producing TV's, Computers, Wheat, Rice, automobiles etc. Not only are these wants recurring, but they expand as time passes by. For example, a person who eats pizza today might want to eat pizza again after one week. A person who buys an i-pad today might want to buy an i-phone too. Hence, wants or desires are unlimited.

In order to produce these goods and services factors of production like land, labor, capital and organization are required. However, these resources are not adequate in relation to unlimited desires. Scarcity is never in absolute terms but in relation to the unlimited desires which require unlimited resources.

 

Concept of choice

The concept of choice comes from the problem of unlimited wants. As wants are never ending and the means through which these wants can be fulfilled are fixed or given, people have to make choices. All wants cannot be satisfied, therefore making a choice between what want to satisfy now and what to leave for future should be done. This is known as the problem of choice. A country with its resources can do many things like investing in agriculture sector, or investing in industrial sector or investing in social sector. However, investment in all these areas is not possible due to the lack of different resources like funds, skilled human resources, advanced technology etc. Hence, it has to make choice by setting its priority sector.

 

Scarcity and choice

Scarcity and choice are two sides of the same coin. Choice exists because resources are scarce and choice involves the use of scarce resources for some particular cause. There are number of things that people, society, countries want. However, the means to attain those needs, fulfill those desires are limited. Hence, an order of preference must be listed or choice must be made among those viable and desirable alternatives according to ones resource endowment. This is known as choice among alternatives.

Both affluent as well as poor countries have the problem of scarcity of resources. One might argue that how could advanced economies have the problem of resource scarcity but he/she has to understand that the desires of such economies are also massive in proportion to their resource endowments. Hence, there arises the problem of scarcity and choice in all sorts of economies.

 

Allocation of resources

Allocation of resources is defined as the process of selection of resources and their proper utilization.  Possession of resources in an economy is limited and those resources have various uses. Decision makers have to choose one among those various uses which maximizes its satisfaction. Decision makers have to answer the basic following questions in the allocation of resources.

The main problems relating to the proper allocation of resources are explained as follows:

 

What to Produce?

An economy endowed with limited resources and unlimited wants have to make a choice about what good to produce and in what quantities. If an economy decides to produce more of consumer goods, it has to produce less of the capital goods. There always exists tradeoff between various uses of the precious limited resources. If resources were not limited, the problems would not arise because in that case we would be able to produce all goods we wanted in desired quantities. Hence, the goods and their quantity to be produced has to be prioritized by the economy.

 

How to produce?

The question of how to produce is related with the use of which resource to use in the production process. It connects to the question of technique of production in an economy and is concerned with producing the maximum output at the least cost. The same goods and services can be produced using more labor (labor intensive technique) or using more capital (capital intensive technique). An economy has to use that method of production which gives the maximum output at the least production cost.

 

Whom to Produce?

After deciding on what to produce and how to produce, an economy has to decide on the distribution of the produced goods and services to different sections of the society. It has to decide how the national product be distributed among different factors of production or among different individuals and families.

 

How to achieve fuller utilization or full employment of resources?

Economies have to decide how to optimize the resource use so that maximum output can be produced efficiently. Every economy is plagued by the problem of scarcity of resources in relation to the unlimited wants. Hence, idle resources are a curse for every economy. In order to satisfy the demand of the economy full utilization of resource must be ensured.

 

How to achieve growth of resources?

Another central problem of the economy is to increase the level of production. It is also known as the problem of growth of resources. Each economy is faced with the problem of how to increase its production capacity so that the total production can be increased. An economy can achieve the objective of growth of resources through technological advancement.

 

Concept of production possibility curve

Human wants are unlimited and resources to achieve those wants are limited. Every society faces the problem of scarcity and choice. Hence, priorities are set and goods to produce and their quantities are decided. A production possibility curve is the locus of various combinations of two goods or services that an economy can produce with the full use of its given resources and state of technology.

In the words of Samuelson, " Production possibility curve is the curve which represents the maximum amount of a pair of goods or services that can both be produced with an economy's given resources and technique, assuming that all resources are fully employed". It shows the alternative combinations of maximum goods and services that can be produced with the given assumptions. It is also called 'production possibility boundary or frontier' because it shows the limit of what it is possible to produce with the available limited resources. It is also called a 'transformation line or transformation curve' because resources are transformed from one use to the other by switching to different combinations of production.

 

Assumptions of Production Possibility Curve

Factors of production are fixed

There is full employment in the economy

Constancy in Technology

Short run basis

Substitution of factors of production

 

Production possibility Schedule

Production possibility schedule shows the alternative combinations of goods and services that an economy can produce with its given resources in tabular format. For example, Let the Nepalese economy with its given resources produces guns and butter. The production possibility schedule shows the alternative combinations of both goods that the economy can produce.

The following table shows the different combinations of guns and butter, guns or butter that the Nepalese economy can produce. The production possibility schedule only shows six different combinations. But there can be infinite number of alternative combinations in a production possibility schedule.

Combination

Guns

Butter

A

0

15

B

1

14

C

2

12

D

3

9

E

4

5

F

5

0

 

Production Possibility Curve

When the production possibility schedule is plotted on a graph, the outcome is a production possibility curve. A production possibility curve shows the different alternative combinations of two goods that can be produced with the given resources. If we plot the above combinations in a graph we get the production possibility curve of the Nepalese economy.

In  the above production possibility curve AF the X axis shows the production of butter while Y axis shows the production of guns. As we can see, the production possibility curve shows six different combinations of guns and butter that the economy can produce. At one extreme is the production of 15 units of butter without the production of guns at point A. At the other extreme is the production of 5 guns without any butter. Other combinations contain both guns and butter. One point to note in the production possibility curve is that as we go on increasing the production of one commodity the production of another commodity decreases. There is tradeoff between the productions of these two goods. For example if we move from point B to point C, the production of guns increases from 1 to 2 units. However, the production of butter decreases from 14 units to 12 units. There can be infinite points in the production possibility curve. An economy can choose any Combination that lies on the production possibility curve. If an economy decides to produce at any point that lies inside the production possibility curve, it is not utilizing its resources fully. An economy cannot produce outside the production possibility curve because the availability of means does not support such production. Hence, it has to produce at any point that falls on the production possibility curve.

 

Shifts in the production possibility curve

An economy's production possibility curve can shift inwards or outwards over time. This might be due to the following reasons.

Change in resources

The amount of resources an economy has can change over a period of time. The resources can increase due to population growth, forestation, finding of a new resource source, training programs leading to the availability of skilled manpower etc. When these resources increase, the production possibility curve shifts outwards. Resources might decrease due to the depletion of renewable resources, natural calamities, deforestation etc. When resources decrease, the production possibility curve shifts inwards.

 

Change in technology

The advancement in technology can take place over a span of time. When such new and efficient technology becomes available, it enhances the production capacity of an economy. This results in an outward shift in the production possibility curve of an economy.


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