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4 units revesion notes

Unit 1: Basic economic problem
Topics: Scarcity, Opportunity cost,
Factors of Production and the PPC.
Scarcity:
Define Scarcity: A situation where there are not enough resources
to achieve human wants.
Resources available on earth to make goods and services to satisfy
our needs and want are limited.
Nature of Economic Problem Unlimited wants and limited
resources lead to scarcity. Choices have to be made. While making
choices opportunity cost is used. Opportunity cost is next best
alternative forgone. Economic problem won’t be solved as wants
are increasing always. If one want is fulfilled, all of a sudden new
wants will emerge.
There are too few productive resources to make all the goods and
services that consumers need and want. Thus there are unlimited
wants with limited resources, it gives rise to the problem of
scarcity thus Scarcity of resources is the basic economic problem.
As the resources are limited to fulfill the requirements of the
economy it gives rise to opportunity cost.
Opportunity cost is a concept in Economics that is defined as those
values or benefits that are lost by a business, business owners or
organisations when they choose one option or an alternative
option over another option, in the course of making business
decisions. In other words, it can be said as the value that is lost
when a business is choosing between two or more alternatives.
Opportunity cost is the cost of choosing between alternative uses
of resources. Making a choice of one use will always mean giving
up the opportunity to use resources in another way and the loss of
goods and services they might have produced instead.
Problems of scare resource allocation is choosing how best to use
limited resources to satisfy as many needs and wants as possible
and maximize economic welfare.
Main aim of economics is to find most efficient resource allocation
Definition of opportunity cost: Opportunity cost is the next best
alternative forgone
Opportunity costs can be calculated using the following formula:
“Opportunity Cost = Return on investment for an option not
chosen – Return on investment for a chosen option”
The following are the limitations of opportunity costs:
1. Future returns cannot be predicted accurately using opportunity
costs.
2. It is difficult to make quantitative comparison between two
available alternatives.
Example: 1.A city decides to build a hospital on vacant land it owns
but it could have built a school or sports center. The opportunity
cost is the value of the benefits forgone of the next best thing
which could have been done. A
land it owns
Example 2: At the ice cream parlor you have to choose between
butterscotch and strawberry. When you choose strawberry the
opportunity cost is the enjoyment of butterscotch.
Example 3: If you decide not to go to work, the opportunity cost is
the loss of wages.
Factors of Production
(L.L.C.E)
Factors of production have been categorized into four types:
1. Land
3. Recreation
4. Cultivation
It refers to all natural resources. All natural resources either on the
surface of the earth or below the surface of the earth or above the
surface of the earth is Land.
One uses the land to produces goods. It is the primary and natural
factor of production. All gifts of nature such as rivers, oceans, land,
climate, mountains, mines, forests etc. are land.
The payment for land is rent.
Characteristics of Land as a Factor of
Production

The land is a free gift of nature.

The land has no cost of production.

It is immobile.

The land is fixed and limited in supply.
Types of Land
1. Residential
2. Commercial
5. Extraction
6. Uninhabitable
3. Capital
2. Labour
All human effort that assists in production is labour. This effort can
be mental or physical. It is a human factor of production. It is the
worker who applies their efforts, abilities, and skills to produce.
Capital refers to all manmade resources used in the production
process. It is a produced factor of production. It includes factories,
machinery, tools, equipment, raw materials, wealth etc.
The payment for labour is the wage.
The payment for capital is interest.
Characteristic
Characteristics

It is a human factor.

Capital is a manmade factor of production.

One cannot store labour.

It is mobile.

No two types of labour are the same.

It is a passive factor of production.
Types of Labour
Types of Capital
1
Unskilled
1. Fixed
2
Semi-skilled
2. Working
3
Skilled
3. Venture
4 Professional
5. Entrepreneur
An entrepreneur is a person who brings other factors of production
in one place. He uses them for the production process. He is the
person who decides

What to produce

Where to produce

How to produce
A person who takes these decisions along with the associated risk is
an entrepreneur.
The payment for land is profit.
Characteristics

He has imagination.

He has great administrative power.

An entrepreneur must be a man of action.

An entrepreneur must have the ability to organize.

He should be a knowledgeable person.
FOP
Payment
Definition
Examples
Geographical mobility
Occupational mobility
Land
Rent
All natural
resources used in
production. It
include what’s on
the surface, below
and above the
surface
River water
used in
Production
Mere Land Geographically
Immobile
Some land Occupationally mobile
All human
resources both
mental and Physical
used in production
Workers,
All man made
goods used in
production
Machines,
tools and
building
Labour
Capital
Wage/
Salary
Interest
E. g. can built houses or mall
Raw materials
Geographically mobile
Managers
Some land Occupationally immobile
Some are geographically
immobile if they are having
family ties and health
issues
Some are occupationally
Building- geographically
immobile
Some are occupationally mobile. E.g. building
can be used to make notebooks or pencils
Immobile if they are not having required skill and
qualification
Other capital
geographically mobile
Enterprise
Profit
Risk bearing and
decision making
factor of production
Idea of the
entrepreneur
PRODUCTION POSSIBILITY
CURVE
Most mobile factor
Most mobile factor
A
production possibility curve also known as the (PPC) is made to
evaluate the performance of a manufacturing system when two
commodities are manufactured together.
diverts its resources to produce commodity B, the production of
commodity A reduces.
A point above the curve indicates the unattainable with the
available resources. A point below the curve means that the
production is not utilising 100 percent of the business’ resources.
The PPC helps to plan the perfect proportion of goods to produce
in order to reduce the wastage and costs while maximising profits.
The diagram or graph explains the units of goods that a company
can produce if all the resources are utilised productively.
Therefore, a single commodity’s maximum manufacturing
probability is arranged on the X-axis and that of the other
commodity on the Y-axis. Here, the curve is represented to show
the number of products that can be created with limited
resources, while pausing the use of technology in between.
In the graph, the line sloping down also depicts the trade-off
between producing commodity A and commodity B. When a firm
The production of 20,000 watermelons and 1,20,000 pineapples is
shown on point B in the graph. If the production of watermelons
needs to be more, then the production of pineapples should be
less. On the graph, point C indicates that if the production of
watermelons has to be 45,000, then the company can deliver only
85,000 pineapples. With this trade-off, the curve shows the idea of
opportunity cost.
The production possibility curve also shows the choice of society
between two different products
The shape of the PPC curve is downward sloping and concave to
the point of origin. The PPC curve is downward sloping because of
the few units we sacrifice for the others as there exists an inverse
relationship between the change in quantity of one commodity
and the change in quantity of the other commodities.