UNIT I CENTRAL PROLEMS OF AN ECONOMY
I Central Problems of an economy 
(i)
Problem of allocation 
 What to Produce – It is a problem of selection of good and its quantity to be produced. As
resources are limited , the producer has to make this choice . He can produce Consumer
goods / Capital goods , Necessary goods / Luxury goods etc
 How to Produce – It is a problem of choice of technique of production . Producer may use
Labour-intensive or Capital Intensive technique. To minimise his cost of production , the
producer has to select the technique.
 For whom to Produce – It is a problem of distribution of National Output or income among
the people in the economy.
(ii)
Problem of Full and efficient use of resources
(iii)
Problem of Growth of resources
II Why do the Central problems arise ?
(i)
Unlimited human wants having different priorities
(ii)
Limited resources with alternative uses
Hence , Central problem arises due to SCARCITY of resources.
III Production Possibility Curve ( PPC) / Transformation Curve 
 Meaning -- A curve showing different possibilities of production of two goods with full use of
given resources and technology .
 Nature of PPC –
(i)PPC is a downward sloping curve  As resources are fully employed, the producer can
increase production of one good by reducing production of the other. So PPC is downward
sloping.
(ii)PPC is concave to the origin  PPC is concave because of increasing marginal
opportunity cost ( increasing MRT) . As resources are use specific , the producer has to
give up more and more unit of one good to get every additional unit of a good.
 Note : (i) PPC is Concave when MOC or MRT is increasing
(ii)PPC is Convex when MOC or MRT is decreasing
(iii)PPC is straight line when MOC or MRT is constant

PPC IS CONCAVE TO THE ORIGIN IN REAL LIFE BECAUSE RESOURCES ARE USE-SPECIFIC AND
MOC or MRT is increasing.
IV Central Problems with PPC 
 Point on PPC shows full employment of resources

Point inside PPC shows under-utilization / inefficient use of resources -- If resources are
better utilised / efficiently utilised , the economy will move from from a point inside PPC to a
point on PPC. Example – Unemployment of labour in India, Under-utilisation of existing
capital in India etc
Swachha Bharat Abhiyan scheme, Employment generation scheme etc of the govt helps
Indian economy to move a point inside PPC to a point on PPC.

Rightward shift of PPC shows Growth of Resources -- PPC of an economy will shift rightward
if there is growth of resources in the economy.
Example – Foreign investment in the country, Migration of labour from abroad to India,
Supply of skilled labour in India, Introduction of all Education expansion scheme by the govt,
Make In India scheme to increase inflow of foreign capital in India , Immunization for all
children by 2020 scheme of govt (Mission Indradhanus scheme) , exploration of new
resource (new oil field etc) in the country, advancement in technology in India etc.

Leftward shift in PPC shows destruction of resources / decrease in resources -- If there is
destruction / decrease of resources in India , PPC will of India will shift leftward.
Example – Destruction of resource due to natural calamities (flood/ draught/ fire etc) in India ,
Migration of labour from India to abroad, Large scale Outflow of capital from India etc.
V Marginal Opportunity Cost (MOC) / Marginal Rate of Transformation (MRT) 
 MOC shows the amount the good the producer has to give up to produce an additional unit
of a good.
 MOC = Loss of good / Gain of good
 Example :
Production
Possibilities
A
B
C
D
E

Good X
Good Y
0
5
10
15
20
100
90
70
40
0
MOC or MRT
= Loss / Gain
-10/5 = 2
20/5 = 4
30/5 = 6
40/5 = 8
Remarks
MOC or MRT is
increasing .
Hence PPC is
concave .
Diagram -Good Y
Y1
Y2
X1
X2
Good X
MOC = Loss / Gain = Y1Y2 / X1X2
VI Opportunity Cost 
 It is the value of a factor in its next best alternative foregone . Opportunity cost is the
opportunity lost. Example : A plot of land can be used for rice production ( Rs 200) or wheat
production (Rs 100) or pulses production (Rs 150). If the producer produces rice then he has
to give up production of wheat and pulses. Opportunity cost of Rs 200 rice production is Rs
150 pulses production.
 In previous diagram , Opportunity cost of (X1X2) unit of good X is (Y1Y2 ) unit of good Y.
VII Micro Economics  The branch of economics which deals the economic problems of an individual
firm or consumer . Eg. Profit of a TV company is increasing , Consumer equilibrium etc.
VIII Macro Economics  The branch of economics which deals with economic problems at the level of
an economy as a whole. Eg. Problem of unemployment in an economy.