Unit 1

Basic Economic
Problems
* MicroEconomics - deals with
individual units or groups

* MacroEconomics - deals with nation

or economy as a whole
 This is a
need!

A Want
 This is a
need!

A Want!!!
 This is a
need!

A Want!!!
Our wants are UNLIMITED but resources
are LIMITED………

So there is SCARCITY

Hence we have to make

CHOICES
 So we say,
Resources are FINITE
but
Wants are INFINITE
 Economics
is the
Science of CHOICE
(decisions made by YOU and ME, FIRMS,
GOVERNMENT )
Hence scarcity forces us
to make CHOICE
After the CHOICE has been made………

You will use different resources to

FULFILL THE CHOICE

ALLOCATION OF RESOURCES
Decision on ALLOCATION
OF RESOURCES, Leads to
3 major economic
problem/ questions:
• What to produce
• How to produce
• Whom to produce
Basic Economic Problem- 3 decisions

• WHAT TO PRODUCE

• Food or Clothes
• Cars or hospitals
• ipods or Cosmetics or military strength
Basic Economic Problem- 3 decisions

HOW TO PRODUCE

 techniques used.
 least cost method of production
 labour intensive or capital intensive
Basic Economic Problem- 3 decisions

for WHOM TO PRODUCE

 Will everyone get an equal share
of what is produced ?

 Would the income be distributed

equally?
• Production: Creating goods and
services

• Consumption: Using the goods

and services to satisfy want
Factors of Basic
Production (FOP)
Economic Problem
Labour
The Enterpreneur:
- Organizes the 3 factors and production process
- Takes the risk (Profit and Loss)
 Goods produced

Economic Goods Free Good

Made by using
resources/ FOP FOP not needed.
Eg: They have a Eg: Air, water
price
Opportunity
Cost
If I ask you, what will
you choose??
What is your choice?
Schools Or libraries

Roads Or Hospitals
• What you DO NOT CHOOSE is your
Opportunity Cost

• Opportunity Cost is the

highest cost forgone when making the
decision
Who has to face this problem
of Opportunity Cost?
• You and me (Individuals)

• Firms (Business)

• Government
Production Possibility Curve (PPC)

• Every decision/choice we make has

an Opportunity Cost

• This idea of Opportunity Cost

can be illustrated using a PPC
A Typical PPF ………….
Unattainable

Opportunity
cost of is
increasing…

Inefficient
• Production Possibility curve (PPC) shows the
maximum combinations of goods and
services that can be produced by an
economy in a given time period with its
limited resources

• A point outside the graph is unachievable

and a point inside the graph is inefficient
 PPC also tells you:

• What you can and cannot produce

• What is the cost of producing the

other good
Depending on our choices of Production,
the opportunity cost may

Remain Constant
Increase
Decrease
 Production Possibilities/ Trade Off
A = 24 lbs of coffee
B = 16 lbs of cofee & 4 units of computers
Coffee
(lb/day) C = 8 lbs of cofee and 8 Computers
24 A
D = 12 units of Computer
Cost of
B
16
4 computers= ?
Another 4 Computers= ?
8
C Another 4 Computers = ?
Hence Opportunity cost is
D Computers same
0 4 8 12 (unit/day)

Slide 35
 Constant O.C Decreasing O.C

Increasing O.C

Unit 1 : Macroeconomics
National Council on Economic
Education
• Consumer Goods
Products purchased by consumers
for personal or household use.

• Capital Goods
Producers’ goods or means of
production (Eg: Machines)
Creating Capital goods  Investment
Shift in PPC
Economic Growth
Butter
C Shift in PPC
B
Economic Growth
due to……

0
A Guns

Availibility of resources (Quantity and

Quality)
Increased Labour force
Improved Technology
Butter Shift in PPC
C
A Economic Decline
due to …..

0 B D Guns

Decline in resources
Working population falls