Basic Problems of An Economy

Basic Problems Of An Economy
1. What is an economic problem?

Economic problem is the problem regarding the allocation of limited resources for the
production of alternative goods and services.
2. What is the problem of choice?

Economic problem is the problem of choice. Since the resources are scarce and they
have alternative uses, there arises the problem of choice regarding the use of these
resources.
3. What is meant by scarcity in economics?

The law of scarcity states that goods are scarce because there are not enough
resources to produce all the goods that people want to consume.
4. State the characteristics of economic resources.

I. Limited resources: The resources of a society consists of land, labour,
capital equipment and entrepreneurship. These productive resources are called factors
of production because they are used in producing goods and services. These
productive resources are limited in supply.
II. Resources have alternative uses: Resources can be put to alternative uses.
For example: a piece of land can be used to produce wheat, vegetables etc. This
implies that with limited resources with their alternative uses, the economy can decide
to produce more amount of some commodities and less of other commodities.
5. Why do economic problems arise?

i. Unlimited wants: The first fundamental fact is that human wants are unlimited.
Human wants are multiple and they tend to multiply over time. Goods and
services are needed to satisfy these wants. Hence, there is an unlimited desire of
the people for goods and services.
ii. Limited resources: The resources of a society consists of land, labour, capital
equipment and entrepreneurship. These productive resources are called factors
of production because they are used in producing goods and services. These
productive resources are limited in supply.
iii. Resources have alternative uses: Resources can be put to alternative uses.
For example: a piece of land can be used to produce wheat, vegetables etc. This
implies that with limited resources with their alternative uses, the economy can
decide to produce more amount of some commodities and less of other
commodities.
Thus, economic problems arise from the scarcity of resources to human wants.
Since the society cannot satisfy all its wants due to limited availability of goods
and services, it must make a choice as to which wants are to be satisfied and
which wants need to be left unfulfilled for the time being. Since resources are
limited, society has to choose between the alternative uses of the available
resources. This is known as the problem of choice.
6. Explain the central problems of an economy.

i. What to produce: The first central problem which every economy has to
face is briefly termed as ‘what to produce’. It involves two interrelated things, viz.
What commodities shall be produced and in what quantity. It is the problem of
determining the quantity of each commodity and service to be produced. It has to
make a choice between consumer and goods like food, clothes, furniture etc.
And capital goods like machinery, tools, plants. Similarly, it has to decide whether
to produce more civilian goods, such as food, furniture or war-time goods like
guns, tanks etc.
ii. How to produce: This is the problem of choice of method or techniques

of production. There are two types of techniques of production, viz.
Labour-intensive and capital intensive. A labour intensive technique uses more
labour and less of capital to produce a given quantity of output, whereas a
capital-intensive technique uses more of capital and less of labour to produce the
same output. Labour-surplus economies make more use of labour-intensive
technique as compared to labour-scarce economies. It has to be economical in
the use of productive resources and it depends on the level of technical
knowledge available in the economy.
iii. For whom to produce: It is the problem of distributing the total output of
goods and services produced in an economy among its members. The sum total
of these goods and services is called a national product. This national product,
therefore, generates national income, which is distributed among various
productive resources in the form of various types of factor incomes, such as
wages, interest, rent etc.
7. What is meant by economising of resources?
By economising of resources we mean that the available resources should be allocated
among different uses in such a way that resources are put in their best possible uses.
8. Define production possibility curve.

A production possibility curve is the curve which shows various combinations of two
goods that can be produced with available techniques and with a given amount to
resources.
9. Give any two assumptions of production possibility curve.

i. The amount of productive resources is fixed.
ii. There is no change in technology,
10. Point out two characteristics of ppc.

i. The ppc slopes downward to right: A downward sloping ppc indicates that the
economy must give up some quantity of one good to obtain additional quantity of the
other good, assuming that resources are given and they are fully utilised in the most
efficient way.
ii. It is concave from the origin: It indicates increasing opportunity cost. It shows that
the quantity of the other commodity which needs to be given up to get one unit of the
commodity. The reason for increasing opportunity cost is that resources are not equally
efficient in the production of all goods. Therefore, as we transform more and more
resources from the production of one good to the production of other good, the
production of other good will increase in sacrifice of the production of one.
11. Explain the shape of a ppc.

The production possibility curve slopes downwards to right. It is concave from the origin.
12. What does a point within the ppc show?

If the economy is producing any combination of goods lying inside its ppc, it would
mean that either some of its resources are lying idle or some of its resources are used
inefficiently in production.
13. What does a point outside the ppc indicate?

Points outside the ppc show combinations that cannot be attainable because sufficient
quantities of resources are not available to produce them. The economy does not have
enough resources to produce these quantities.
14. What is meant by opportunity cost?
The opportunity cost of a commodity is the quantity of the other commodity which need
to be given up to get one unit of it.
15. What does a shift in ppc indicate?

A shift in ppc indicates an economic growth. Economic growth results in increased
availability of resources and technological development. As a consequence, the
capacity of the economy to produce goods and services increased. Economic growth
shifts the ppc outward.
16. How does increase in the quantity of resources affect ppc?

Economic growth results in increased availability of resources and technological
development. As a consequence, the capacity of the economy to produce goods and
services increased. Economic growth shifts the ppc outward.
17. Show the effect of improvement in technology on ppc.

18. What factors lead to a shift of ppc?

19. Illustrate the following economic problems on a ppc:

i. Allocation of resources.
If all resources are fully and efficiently utilized, the production will takee place at
some point on the ppc.
ii. Unemployment of resources.

Unemployment of resources implies that capacity to produce goods to that extent
goes waste and the society loses goods and services that could have been produced by
these idle resources. The economy will produce any combination inside the ppc.
iii. Economic growth

Best wishes
Nabanita Roy
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Basic Problems of An Economy

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Basic Problems Of An Economy

1. What is an economic problem?

2. What is the problem of choice?

3. What is meant by scarcity in economics?

4. State the characteristics of economic resources.

5. Why do economic problems arise?

6. Explain the central problems of an economy.

ii. How to produce: This is the problem of choice of method or techniques

8. Define production possibility curve.

9. Give any two assumptions of production possibility curve.

10. Point out two characteristics of ppc.

11. Explain the shape of a ppc.

12. What does a point within the ppc show?

13. What does a point outside the ppc indicate?

15. What does a shift in ppc indicate?

16. How does increase in the quantity of resources affect ppc?

17. Show the effect of improvement in technology on ppc.

18. What factors lead to a shift of ppc?

19. Illustrate the following economic problems on a ppc:

ii. Unemployment of resources.

iii. Economic growth

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