Chapter 2

In this we will discuss about:

:- CENTRAL PROBLEMS OF ECONOMY

:- PRODUCTION POSSIBILITY CURVE
:- CONCEPT OF OPPORTUNITY COST
AND MARGINAL OPPORTUNITY COST
 CENTRAL PROBLEMS OF ECONOMY

1) Allocation of resources
(a) What to Produce and How much to
produce?
(b) How to produce?
(c) For whom to produce?
2) Utilisation of resources
3) Growth of resources
 Allocation of resources

What to produce :

In the central problem we decide which

type of goods we should produce whether
we produce capital goods or consumption
goods, luxury goods or inferior goods, war
goods or peace goods to live a good quality
of life.
How to produce:-

In this central problem we decide which type

of techniques we should use to do the
production. There are two techniques of
production
a) labour intensive techniques
b) capital intensive techniques

Labour intensive techniques imply greater use of

labour then capital, while capital intensive techniques
imply greater use of machines than labour. Capital
intensive techniques promote efficiency. It
accelerates the pace of growth. On the other hand
labour intensive techniques promote employment.
For whom to produce:-

In this central problem we decide for whom

we should produce goods whether we
produce goods for

rich people or poor people.

 Utilisation of resources

Problem of Efficient or Full Utilization of

Resource:-

Are the resources being used efficiently?

Since Resources are scarce, it is obviously desirable

that they should be most efficiently used, i.e., the
production and distribution of the national product
should be efficient.
 Growth of resources

Another important issue to know whether the

productive capacity of an economy is
increasing, static or declining.
The increase in productive capacity of an economy
over time is called economic growth. For under-
developed economies, their basic problem is how to
accelerate the pace of their economic growth.
 Production possibility curve (PPC)

Meaning :
It is a curve showing alternative production of
two sets of goods with the given resources
and techniques of production.

Assumptions are:
1) Resources are given.
2) Given resources are fully and efficiently utilized.
3) Technology does not change.
Other names:-

1) Production possibility Frontier.

2) Transformation Line
3) Transformation Curve
4) Production possibility boundary
PPC Schedule

Wheat 100 90 70 40 0
Cloth 0 1 2 3 4
Shifting of PPC:

(a)Increase in resources

(b)Decrease in resources
Rotation of PPC (due to change in technology)

(a) Efficient technique used in production of Good X

(b) Efficient technique used in production of Good Y

Properties of PPC

(1) Slopes downward :

PPC slopes downward because with the given resources
increase in output of good X is possible only when there
is decrease in output of good Y. It shows inverse
relationship.

(2) Concave to the point of origin :

PPC is concave to the origin because of increasing
slope, as we move along this curve, from left to right.
Since slope of PPC = MOC, increasing slope implies
increasing MOC.
Q. Can PPC be a straight line?
Ans. Yes, when MRT or MOC is constant.

Wheat Cloth MRT

16 0 -------
12 1 4:1 = 4
8 2 4:1 = 4
4 3 4:1 = 4
0 4 4:1 = 4
 Opportunity cost
It is the sacrificing cost for next best alternative use. In
other words, it is the cost of shifting resources from one
good to another. It is equal to the loss of output of good
Y when resources are shifted from good Y to good X.

Marginal opportunity cost (MOC)

OR
Marginal rate of transformation (MRT)

It refers to opportunity cost per unit of additional output

of good Y when some resources are shifted from one
opportunity to another.

Loss of output Y
MRT OR MOC =
Gain of output X