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
Economic Problem
Factors of Basic
Production
(FOP)
Labor
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 price
Eg: Air, water
Opportunity Cost
If I ask you, what will
you choose??
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 is 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
C = 8 lbs of cofee and 8 Computers
D = 12 units of Computer
Coffee
(lb/day)
A
24
B
16
C
8
D
0
4
8
12
Computers
(unit/day)
Cost of
4 computers= ?
Another 4 Computers= ?
Another 4 Computers = ?
Hence Opportunity cost is
same
Slide 36
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
Shift in PPC
Butter
C
B
Economic Growth
due to……
0
A Guns
Availibility of resources (Quantity and
Quality)
Increased Labour force
Improved Technology
Shift in PPC
Butter
C
A
0
Economic Decline
due to …..
B
D
Guns
Decline in resources
Working population falls