Basic Problem of an Economy
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Transcript of Basic Problem of an Economy
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Basic problems of an economy
XI EconomicsChapter 3
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Economic Problem Economic Problem: Scarcity is the fundamental problem of
every society Reason: None of us can have all that we
want Limited amount of human and non-human
resources It’s not possible for any economy to
produce every type of good in an unlimited quantity
Hence, every economy has to take the basic decision of making best use of its available resources in producing goods and services.
The Law of Scarcity
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Why does economic problem arise? Unlimited Wants
Multiply over time Many wants recurring Wants differ in their urgency
Limited Resources Productive resources – scarce Labour – by size of population Land – by area of the country Capital & technology – scarcity of various
inputs Alternative Uses of Resources
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Economizing of ResourcesThe available resources should be allocated among different uses in such a way that resources are put to their best possible use.
What is true of an individual is also true of an economy. Every economy, Capitalist or socialist Developed or underdeveloped
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Basic or Central ProblemsWhat to produce and how much
to produce?How to produce?For whom to produce?Problems of fuller utilization of
resources.Problem of efficiency in utilization
of resources.Problem of economic growth
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PPC and Central Problems
Possibilities
Butter(Million
kg)
Guns(Thousand
s)
Marginal Opp. Cost of Butter
(Thousand of Guns)
A 0 15 -B 1 14 1C 2 12 2D 3 9 3E 4 5 4F 5 0 5
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Draw Curve on given table
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Prepare Schedule
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Exercise
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Conclude on your own
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Conclude on your own
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Assumptions of PPCThe amount of resources is fixed
Unchanged techniquesFull employment of resources
Resources are not equally efficient in the production of all commodities
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CharacteristicsIt slopes downwards to right
It is concave from the origin
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Central Problems on a PPCProblem of ScarcityProblem of ChoiceProblem of What to ProduceProblem of Full and Efficient utilization of the resources
Problem of Economic Growth
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Economic Growth
It is generally defined as the process whereby real per capita income of a country increases over a long period of time
Focus three things,1. Rise in PCI2. Rise in PCI in real terms3. Long period
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Economic Development
Traditionally, economic development has been defined as a sustained increase in real per capita income. (1960s and 1970s)
The process whereby the real PCI of a country increases over a long period of time, along with reduction of poverty, inequality and unemployment.
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Growth Vs DevelopmentGrowth Development
Narrow Concept ComprehensiveMore O/P Composition of O/P,
Allocation of ResourcesRise in Income Also reduction of
poverty, inequality of income and employment
Defined strictly in terms of economic indicator, i.e., income
But also, non-economic indicators like literacy, health services, etc.
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Growth Vs DevelopmentGrowth Development
Quantitative Also QualitativeEasier to realise More extensive. Involves
a whole lot of changes in the society
Developed countries Developing countriesLess government intervention required
Demands active involvement of the government
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Stages of Economic Growth Prof. W. W. Rostow
1. Traditional Society2. Pre-take off stage3. Take-off stage4. Drive to Maturity5. The age of high mass-
consumption
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1. Traditional Society
Absence of modern science and technology
Low output and productivityPrimitive methods of productionSufficient to meet the basic
consumption needsNo saving or investmentAgriculture is the mainstay
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2. Pre-take off stage
Transitional era – pre-conditions for sustained growth are created
Aspiring for a higher standard of livingChanges occur in values, social attitude
and expectationsEducation and entrepreneurship spreadsTechnological revolution in agricultureExpansion of trade (internal & external)
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3. Take-off Stage
Process of economic growth starts which becomes self sustained (without govt. action)
Initiated by a sharp stimulusLarge increase in the rate of saving
and investment – high rate of growth of o/p
Essential part – development of one or more leading sectors in the economy.
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4. Drive to Maturity
Goal of high level of per capita o/p
Period of high, long sustained economic growth
Effective application of modern technology in all the sectors
Rate of investment is well high over 10 % of national income
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5. The age of high mass-consumption
Final stage of economic growthPCI becomes very high, leading to
high standard of livingExtensive use of durable consumers’
goods and household gadgetsBalance of attention of the society is
shifted from problems of production to problems of consumption.