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CENTRAL PROBLEMS OF AN ECONOMY :)

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by Vasudha Krishnamurthy on 29 December 2010

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Transcript of CENTRAL PROBLEMS OF AN ECONOMY :)

CENTRAL PROBLEMS OF AN ECONOMY Human needs and wants are unlimited. Economic resources to fulfil these human needs are limited. This implies that we cannot have everything we desire and we must make choices. This situation of making choices stems the central problems of an economy. Scarcity means the limitation of a resource in relation to the demand for the goods they can produce CAUSES OF AN ECONOMIC PROBLEM UNLIMITED WANTS: Human wants are unlimited.As one particular want is satisfied,another arises and this goes on endlessly.
Human wants are increasing day-by-day with the development of education,civilisation and knowledge.
In every society,there are innumerable wants which remain unsatisfied at a given time.
wants are competitive as they differ in intensity. LIMITED MEANS: Goods and services that satisfy human wants are produced by the various factors of production.ie: land,labour,capital and enterprise.
These resources are scarce while the wants are unlimited.
Due to scarcity of these resources,an economy cannot produce all the goods and services required by its citizens.
Thus,some wants will be unsatisfied. MEANS HAVE ALTERNATE USES: Means are not only limited but they also have alternative uses. EX: electricity can be used for cooking,entertainment,etc.
Thus, choise has to be made between different alternative uses. Making best use of the available scarce resources is known as the problem of economising of resources. BASIC PROBLEMS OF AN ECONOMY scarcity of resources is a common feature in all types of economies,namely-developed,underdeveloped,opened,closed,capitalist,socialist,mixed,etc.
Thus,every economy has to face the problem of choise,which is called the central or the basic problems.
The three basic problems of an economy are:- 1. What to produce?
2.How to produce?
3. For whom to produce?
WHAT TO PRODUCE AND IN WHAT QUANTITIES? Remember that resources (land, labor, capital, entrepreneurship) are scarce or limited. We cannot have everything; we must make choices. Which ones are best? For allocative efficiency we should choose the combination of goods and services that creates the most value or utility.
Every choice bears a cost. We cannot choose one option without forfeiting another. Suppose the choice is to produce either a bag of potato chips or a tube of lipstick. If we choose the potato chips, we lose the lipstick. If we choose the lipstick, we lose the chips. To an economist, true costs are what we must sacrifice or give up to get something.
The economy has to choose between consumption goods(sugar,cotton,cloth,shoes,etc) and Capital goods(machines,tools,factories,etc) Opportunity costs are the value that must be sacrificed or given up. They also are the value of our next best alternative or opportunity. Why? Every time we make a choice, what we sacrifice is our next best alternative. HOW TO PRODUCE? It relates to the techniques of production to be employed while producing goods and services.
Goods and services can be produced in 2 ways:- a) Using LABOUR intensive techniques( ie: more of labour and less of capital will be used to produce goods and services)
b) Using CAPITAL intensive techniques(ie: more of capital and less of labour will be used to produce goods and services) The economy has to decide whether the chosen goods and services should be produced using automatic machines or handicrafts. Both have advantages as well as disadvantages.
MECHANISATION:-
Advantage- Increases the quantity and improves the quality of production.
Disadvantage- causes unemployement.
HANDICRAFTS:-
Advantage - Generates employement.
Disadvantage- The amount of goods produced are less.
FOR WHOM TO PRODUCE? The third problem of allocating of resources is the problem of distribution of the produce among the various factors of production-ie: Land,Labour,Capital and Enterprise.
The economy has to decide who should get more and who should get less.
In India the poverty line is extensive so the problem of whom to produce arises as mass production for the poor alone cannot take place as there are a few rich people too.Then arises the problem of how much to produce as there cannot be an exact estimation of the number of rich and poor people ppl on a daily basis and also what to produce as there are many mass goods and many luxury goods The workers get some amount of the output Some amount of the output is paid as rent for the land His capital has to be compensated He gets some profit For ex: A farmer produces 10 tons of wheat.His output is allocated in a way that:- India is a South Asian country that is the seventh largest in area and has the second largest population in the world. The land covers an area of 3,287,240 square km and the population stands at 1,202,380,000 people .
India is developing into an open-market economy.
The economy of India is the eleventh largest economy in the world by nominal GDP.
The country's per capita GDP= $3,176 (2009).
ndia's large service industry accounts for 57.2% of the country's GDP while the industrial and agricultural sector contribute 28% and 14.6% respectively. INTRODUCTION TO THE ECONOMY OF INDIA. PROBLEM OF FULLER UTILISATION. There should be no wastage of scarce resources in the economy.
To get maximum production,the scarce resources need to be fully utilised. Unemployment of resources means that the society is not able to produce all the goods and services that could have been produced with the available resources. For ex: If a worker is not employed for a particular period, he does not contribute to the output during THAT period of unemployment. PROBLEM OF EFFICIENCY. This is the problem of how to obtain efficiency in the utilisation of resources and distribution of what has been produced.
The economy is producing efficiently when it is not able to produce more of a particular commodity without producing less of the other commodity. PROBLEM OF ECONOMIC GROWTH. Human beings want higher and better standards of living fo which the available goods and services need to increase over time.
Resources can be increased by two ways:-
By exploiting the unused resources.
By making technological advancements. This is one way an economy can get EVERYTHING without having less of ANYTHING. For ex: Developed countries like USA,Canada,Japan etc are rich because of the resources and advancements in technology. Where as Developing countries like India and pakistan have remained poor due to the lack of technology and poor growth of resources.
A production-possibility curve or product transformation curve, is a graph that shows the different rates of production of two goods and services that an economy can produce efficiently during a specified period of time with a limited quantity of productive resources, or factors of production-land,labour,capital and enterprise.
Available resources can be used alternatively to produce different combinations of goods and services which are known as production possibilities. The curve which depicts these alternative goods is called production possibility curve.
PRODUCTION POSSIBILITY CURVE Opportunity cost- If there is no increase in productive resources, increasing production of a first good entails decreasing production of a second, because resources must be transferred to the first and away from the second. Points along the curve describe the trade-off between the goods. The sacrifice in the production of the second good is called the opportunity cost. The slope of the production-possibility frontier (PPF) at any given point is called the marginal rate of transformation (MRT). ASSUMPTIONS The amount of productive resources is fixed.
There is no change in technology.
All the productive resources are fully employed.
All resources are not equally efficient in the production of all goods. CHARACTERISTICS OF A PPC It slopes downwords to the right indiacating that the economy has to forgo some quantity of one commodity to have more quantity of the other commodity.
It is concave to the point of origin which shows the operation of the law of increasing marginal oppurtunity cost. PRODUCTION POSSIBILITY CURVE GIVEN DATA INTRODUCTION... ECONOMIC GROWTH ECONOMIC DEVELOPMENT Economic growth is a narrow topic.It is only concerned with the changes in output of goods and services.
Economic growth relates to the problems of developed countries,as maintainance of a high growth rate is their major issue.
Economic growth may occur without economic development.
Economic growth is possible even with a wide gap between the poor and the rich.
Economic growth is a quantitative concept and hence can be measured.
Economic growth may take place without any change in the outlook of people.

Economic development is a broader concept. it includes both qualitative and quantitative changes in GDP.
It is concerned with the problem of underdeveloped countries which face the problem of unused resources.
Economic development is not possible with economic growth.
Economic development requires the gap to be reduced to a reasonable level.
Economic development is a qualitative concept and hence cannot be measured.
Economic development is associated with change in outlook of people.
SUSTAINABLE ECONOMIC DEVELOPMENT The concept was first propounded by the world commission on environment and development in its report submitted in 1987.
Sustainable economic development means that development should take place without damaging the environment,and the development in the present should not compromise on the needs of the future generations. ECONOMIC GROWTH OCCURS AS THERE IS AN INCREASE IN THE PER CAPITA INCOME.
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