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CLASS 11 ECONOMICS CHAPTER 2 CENTRAL PROBLEMS OF AN ECONOMY INTRODUCTION: Every economy in the world faces the problem of unlimited wants and limited resources. This economic problem gives rise to people making choices about how they would like to use scarce resources. This economic problem gives rise to the central problems of an economy which are as following 1. What to produce and in what quanttese 2. How to producee 3. For whom to producee These are called central problems because every economy has to face them and seek solutons to them. Collectvely these central problems are called the problem of Allocaton of Resources. Different economies solve the central problems differently, as under MARKET ECONOMY- Market economy is a free economy. It means that producers are free to decide what, how and for whom to produce. On what basis do they take their decisionse It is on the basis of supply and demand forces in the market. The decisions are taken as under: (a) What to produce – The producers will produce those goods which offer them high profits (b) How to produce- The producers will always use that technology which efciency maximises and cost minimises . (c) For Whom to produce- In a free economy the producers will produce goods for those people who can afford to pay high prices. Poor sectons of the society are often ignored. It causes the problem of Economic divide( the gulf between the rich and poor). CENTRALLY PLANNED ECONOMY- Here the decisions related to what how and for whom to produce are taken by some central authority of the government. All decisions are taken to maximise social welfare not to maximise profits. Those goods and services are produced which the central authority finds as most useful for the society and that technique of producton will be adopted which is socially most desirable. For instance labour intensive techniques are adopted so as to create employment opportunites MIXED ECONOMY- Mixed economy shares the merits of market economy as well as centrally planned economy. In certain areas decisions are taken entrely on the basis of social consideratons. Briefy in a mixed economy the decisions relatng to what, how and for whom to produce are neither left entrely to market forces nor to any central authority. Both of them play a mixed role. PRODUCTION POSSIBILITY CURVE : We know that resources are limited and have alternatve uses. A producton possibility curve is a curve which shows various combinatons of two goods which can be produced within the given resources and technology showing all possible optons of output for two products that can be produced using all factors of producton. Lets learn it with the help of the following example and diagram: . The above table shows the different possibilites of producton of two goods is called producton possibility schedule. Representng these various producton possibilites on a graph we get producton possibility curve as shown in the above Figure SLOPE OF PPC (i) It slopes downwards from left to right (ii) It is concave to the point of origin. WHY PPC SLOPES DOWNWARDSe It is because with the given resources increase in the output of good 2 is possible only when there is decrease in output of Good1 WHY PPC IS CONCAVE TO THE ORIGINe PPC is concave to the origin because of increasing Marginal Opportunity Cost. This is because inorder to increase the producton of one good by 1 unit more and more units of the other good have to be sacrificed since the resources are limited and not equally efcient in the producton of both the goods. OPPORTUNITY COST- IT is the loss of other alternatve when one alternatve is chosen. MARGINAL OPPORTUNITY COST- IT analyses the effect of producing additonal units of a product on the costs of a business as well as the opportunites the companies give up to produce more of a product. ASSUMPTIONS OF PPC (i) Resources are given (ii) resources are fully and efciently used (iii) Technology remains constant SHIFT IN PPC AND ROTATION IN PPC The PPC shifts towards left when there is a technological degradaton or decrease in resources while the PPC shifts towards the right with advancement of technology or increase in the availability of the resources. While a point below PPC depicts inefciency or underutlisaton of available resources. The above diagram is showing a rightwards shift in PPC.
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