The Economic Problems

ASSOCIATE PROFESSOR DR. SAIDATULAKMAL MOHD

SCHOOL OF SOCIAL SCIENCES & CENTRE FOR GLOBAL SUSTAINABILITY STUDIES,
UNIVERSITI SAINS MALAYSIA
Let’s start our lecture this morning
with a situation … an imaginary
situation
YOU, YOUR FRIEND and YOUR
PET are SURVIVORS OF GLOBAL
CATASTROPHE EVENT and you
found an island to start a NEW
LIFE
The island you found is a
BEAUTIFUL ISLAND with
MANY RESOURCES
Your task is to
DEVELOP A NEW
SOCIETY …

A BETTER SOCIETY
A SOCIETY THAT MEET YOUR NEEDS,
A SOCIETY THAT MEET YOUR FRIEND’S NEEDS
A SOCIETY THAT MEET YOUR PET’S NEEDS
A SOCIETY THAT DOES NOT REPEAT THE
MISTAKE OF THE OLD SOCIETY
 Can you plan
your economy?

WHAT WILL YOU DO?

WHAT ARE YOUR ECONOMIC GOALS?
Share with all of us
your plan

HTTP://BIT.LY/MY_NEW_SOCIETY
What did you
do just now?
YOU WERE SOLVING
ECONOMIC PROBLEMS!
 ECONOMIC PROBLEMS
MATCHING GAME

The economic problem exists because,

although the needs and wants of
people are endless, the resources
available to satisfy those needs and LIMITED
wants are limited RESOURCES
LABOUR

LIMITED LIMITED
RESOURCES RESOURCES
LAND CAPITAL

UNLIMITED
WANTS
Limitation of resources are in terms
of quantity and usage
BASIC ECONOMIC PROBLEMS
The first three problems are the most common

WHAT to
HOW to FOR HOW efficient IS THE
produce & in
produce? WHOM? are the resources ECONOMY
what quantity
being utilized? GROWING?

Allocation of Availability of Distribution of Utilization of Economic

resources resources income resources Growth
 All these problems
can be explained
using
PRODUCTION POSSIBILITY CURVE
 How does a Production Possibility Curve look like?
§ Shows the production combination of TWO GOODS
Capital good (Y)

Production Possibility (Eg: Consumer Goods & Capital Goods)

Curve (PPC)
§ 4 possible combinations of production
•C
§ A – Inefficient. Not maximizing available
•D resources
§ B & C – Efficient. Maximizing available
resources
•A •B § D – Unattainable. Cannot be produced
because insufficient of resources. Attainable if
there is improvement in technology & innovation
to increase resources
Consumer Goods (X) § Choose combinations that give society higher
satisfaction
§ A has lower satisfaction than B and C
§ B means wanting more consumer goods while
C means wanting more of capital goods
Problem #1: What to produce & in what quantity?

§ As resources are limited, society has to

decide on WHAT GOODS TO PRODUCE?
Coconut Oil (Y)

§ Let’s assume that the society has decided to

Produce Coconut Oil and Build Roads on
the New Island

§ Society has to decide how much coconut oil

to produce & how many Roads to build?

§ Decide on the basis of PRIORITIES or

PREFERENCES of SOCIETY
Roads (X)

§ Because resources are limited, production

of one good means, reduction of another

§ Hence, need to choose a combination of

goods in keeping with resources
 Problem #1: What to produce & in what quantity?
Coconut Oil (Y)

§ Let’s assume that society’s PRIORITY is

building roads

Y2 § With X1 of roads built, society’s resources are

adequate to produce Y1 of coconut oil
Y1
§ If let say that PRIORITY CHANGES and that
now the society wants more coconut oil.
So, you decided to produce Y2 of coconut oil

§ The increase production of Y (coconut oil)

X2 X1 Roads (X) to Y2 reduce the building of roads (X) to
X2 due to limited of resources
 Problem #1: What to produce & in what quantity?
Coconut Oil (Y)

§ OPPORTUNITY COST & ECONOMIC

PROBLEM
Y2

§ Opportunity Cost – The next best

Y1 alternative forgone

§ If the economy increases production of

Coconut oil the Opportunity Cost is less
production of roads
X2 X1 Roads (X)
Problem #2: How to produce the goods?

§ As resources are limited, society has to

Coconut Oil (Y)

decide on THE METHOD AND TECHNIQUE

to produce the goods.

§ The decision on this depends on availability

of resources in the economy

§ Labour intensive or Capital intensive?

§ Also depends on the type of goods to be

produced.
Roads (X) § Method and Technique chosen must lead to
EFFICIENT ALLOCATION OF RESOURCES
& INCREASE PRODUCTIVITY
 Problem #2: How to produce the goods?
Coconut Oil (Y)
P1
§ Let us assume that the society has new
Po technology to harvest coconut. This new
technology can harvest 5 times more
coconut than manual harvesting within a
Y2 shorter period of time.
Y1
§ This shifted the PPC outwards (From
PPo to PP1)

§ The original production Y1 has now

P increased to Y2
X1 Roads (X)
 Problem #3: For whom are the goods produced?
Coconut Oil (Y)
§ No easy way to say this as all depends on
the distribution of income

B
§ In a competitive market, all depends on
Y2 ability to purchase

A § Production depends on the demand of the

Y1
goods

§ Production also depends on the welfare

policies of the economy

X2 X1 Roads (X)
§ If Roads are demanded more than
Coconut Oil, produce at A. If people are
more willing to pay more for coconut oil or
demand more of coconut oil, produce at
point B
Problem #4: HOW efficient are the resources being utilized?
Coconut Oil (Y)

§ Society needs to check on whether resources

are used optimally or not.
•C
§ If produced at A, not maximizing resources
and is inefficient.

•A •B
§ Economy has to be pushed to its maximum
potential to points B or C

§ But society has to decide on whether to

produce more Roads or more Coconut Oil.
Roads (X) Both points B and C are efficient points
Problem #5: Is the Economy Growing?
Coconut Oil (Y)

§ Economic growth is attained after a period of

time
•C
§ If an economy starts at point A, then moves to
point B or C, we can say that the economy is
growing.
•A •B
§ Over time, with improved technology and
better capital formation, overall production of
both goods (X and Y) can be attained.

Roads (X) § This is accomplished with the shift of PPC

outward
All economic problems
are related and
interdependent as a
result of limited
resources
IN CONCLUSION
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