Problem of Scarcity, Choice, Central Problems

of an Economy and Production Possibility

Curve

Dr. Bharat Singh

Associate Professor
 Problem of Scarcity and Choice

Introduction:
1. Since time immemorial, every normal human being
has been engaged in some or other kind of Economic
activity to satisfy his wants/needs.
2. In this process he/she generates some
income/resource used to satisfy wants.
3. This kind of economic activity is carried out through
a very complex process involving millions and
billions of decision makers who are unknown to each
other in most cases.
 Problem of Scarcity Contd..

All of us are engaged in such activities because every Society in

this world is confronted with following three basic facts of
human life:
1. Human wants are unlimited
2. Resources to satisfy human wants are limited.
3. Resources have alternative uses.
Unlimited human wants:
• New wants emerge as first one is satisfied
• This process of satisfying and emergence of new wants is an on
going process and never ends.
• Wants vary in their intensity
 Problem of Scarcity Contd..

Limited resources to satisfy human wants:

• Land, Labour, Capital and Enterprise are the
resources to satisfy human wants. These are
also known as factors of prodction.
• Land includes all natural resources like soil,
water, forest, sunlight and minerals etc.
• The supply of many of these natural resourses
is fixed.
 Problem of Scarcity Contd..

• Labour is any physical or mental effort by a person

to produce goods and service.
• Labour varies according to time, space and condition.
• Capital is any asset which is used to produce further
goods and services. These mainly include plants,
machinery, buildings, equipments and inventory etc.
• Human capital is another dimension to capital which
is produced through education, training and skill etc.
 Problem of Scarcity Contd..

• Entrepreneur is perhaps the most important and

active factor of production.
• Entrepreneur is one who arranges and combines
all other factors of production and bears risk of
profit and loss.
• In modern and mass production system there is
separation of entrepreneurs from the managers.
• Therefore, Managers may be treated as another
factor of production.
 Problem of Scarcity Contd..

• Scarcity: Since all the above resources are limited

in supply in relation to their requirements or
demand, the problem of scarcity arises.
• Scarcity is a relative concept and it should be
viewed in relation to its requirements or demand.
• Scarcity is the basic feature of every society or the
economy.
• Scarcity is universal in nature.
 Problem of Scarcity Contd..

Alternative use of resources:

• Resources are not only limited in supply but they have
alternative uses also.
• In other words, a particular unit of resource can alternatively
be used in more than one way and for more than one purpose.
• The alternative use of resources creates the problem of
Choice before every decision maker e.g. as producer or
consumer.
• The problem of scarcity and choice is faces at all levels; the
individual, the firm and the government.
 Problem of Choice

• The problem of choice emerges due to above

mentioned three facts of human life life viz. human
wants are limited, resources are limited and resources
have alternative uses.
• The problem of choice in turn gives rise to several
problems that are known as Central Problems of an
Economy.
• These central problems exist in every economy of the
world; be it a capitalist economy, a socialist economy
or a mixed economy.
 Central Problems of an Economy

Robbins: The economic or the central problems of an

economy is the problem of choice or problem of
economising the use of resources.
This gives rise to following central problems as
suggested by Samuelson:
1. What and how much to produce?
2. How to produce?
3. For whom to produce?
• These are very fundamental and interdependent
problems of an economy.
 Central Problems of an Economy
• These problems are collectively known as problems of
Allocation of Resources
What and how much to produce?
• An economy can not produce more of all goods.
• Because resources are limited
• So it has to decide the allocation of scarce resources to a
particular use and its quantity also.
• Choice of allocation of resources to a particular use depends on
demand, cost of production, technology used and existence of a
particular economic system viz. Capitalist, Socialist and Mixed.
• The problem of allocation of Resources is studied under the
‘Price Theory’ in economics.
 Central Problems of an Economy

• What to produce primarily depends on consumers’

choice.
• The producers are mainly guided by profit
maximisation goal.
• So they honour consumers’ choice.
• Sometimes the government too can decide what to
produce.
• The government may decide to produce an essential
good or service which everyone ought to have.
 Central Problems of an Economy

How to Produce?
• It refers to the choice of technique to produce a good – Use of
appropriate technology.
• Mainly two types of techniques: Capital-intensive and
Labour-intensive.
• Producers normally use the cost minimisation and profit
maximisation technique.
• Use of inappropriate technique may result in wastage of
resources or increased costs.
• Examples of factor endowment and abundance-choice of
technique.
 Central Problems of an Economy

For Whom to produce?

• This is the question of the distribution of national
income among different agents of production e.g.
land, labour, capital and enterprise.
• Factor rewards….question of equality and
inequality may be addressed here.
• Studied under theory of distribution.
• Examples….
 Central Problems of an Economy

Lipsey – Three more economic problems:

• Fuller Utilisation of Resources: Objective is to
attempt for full employment particularly the labour –
studied under theory of income an employment.
• Economic Efficiency – Efficiency in production and
distribution.
• Situation where it is impossible to produce anything
more without producing anything less or make anyone
better off without making anyone worse off – welfare
economics.
 Central Problems of an Economy

• Economic Growth – Refers to question of

increasing the productive capacity of the
economy.
• Saving and Investment has an important role
to play.
• Every economy has to try to increase its rate of
economic growth to improve the living
standard of its citizens.
Production Possibility Schedule and Curve

• PPS – Refers to tabular presentation of various

combinations of two goods and services that an
economy can produce when resources are fully
and efficiently utilised.
• PPC – It is a diagrammatic presentation of a PPS.
• It is also known as Production possibility
Frontier.
 Production Possibility Schedule
Production Possibility Good X Good Y
P 0 21
A 1 20
B 2 18
C 3 15
D 4 11
E 5 6
P’ 6 0
Production Possibility Schedule and Curve

Assumptions of PPC:
• Only two goods are produced in the economy.
• Quantity of resources available in the economy
are given.
• Resources are fully employed.
• Resources can alternatively be used to various
options.
• State of technology is given or assumed to
remain constant.
 PPC Diagram

Y Y

•A •A
•E
•E

•B •B
Good Y •D Good Y
•D

•C •C
O X
Good X Good X X