Kovaipudur, Coimbatore - 42.
Revision Document - Unit 1 - Basic Economic Problem
Subject: Economics (2020 - 21) Class: Grade 9
Name of the Teacher: Shiju Rappai Date: 13th Oct 2020
Name of the student: -------------------------------------
Unit 1.1 - The nature of Economic Problem
Revision Notes:
Resources: The inputs that are used in the production process to produce goods and services.
Three Main types of resources:
These are also called Factors of Production. Resources are limited.
Capital - Human-made goods that are used in the production of other goods. Payment comes in
Interest (Man-made/Capital Resources)
Entrepreneurs (Enterprise) - The person who takes the risk and has the skills to combine the
other factors of production to produce goods and services. Payment comes in Profit
Labour - Human work or effort and the people who offer their services to businesses in exchange
for wages. Payment comes in Wages (Human Resources)
Land - Any resource that exists as part of a natural process. Can be renewable or nonrenewable.
Payment comes in Rent (Natural Resources)
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Mobility of resources: The movement of factors of production from one productive activity to
another. Mobility is the ease of movement of resources between locations and/or between
productive activities. Some factors are highly mobile and thus are easily switched. Other
factors are highly immobile and not easily switched.
Mobility generally takes one of two forms--geographic mobility and occupational mobility.
Geographical mobility is the movement of factors from a productive activity in one location to a
production activity in another location. For example, a worker leaves a job in one city and takes a
job in another city.
Occupational mobility is the movement of factors from one type of productive activity to another
type of productive activity. For example, a worker leaves a job as an accountant to take a job as a
computer programmer.
Please Note: Factor mobility is important as a factor supply determinant, and especially
through the price elasticity of supply. Factors with greater mobility generally have greater
elasticity and those with less mobility tend to have a lower elasticity. If factors can easily move
between occupations and locations, then they can respond easily to higher and lower factor prices.
Changes in mobility trigger shifts in the factor supply curve.
Quality of factors of production:
● Land: The quality of land depends upon the soil type, fertility, weather and so on
● Labour: The quality of labour will depend upon the skills, education and
qualification of the labour
● Capital: The quality of capital depends on how many good quality products can be
produced using the given capital. For example, the capital is said to be of much more
quality in a car manufacturing plant that uses mechanisation and technology to
produce cars rather than one in which manual labour does the work
● Entrepreneurship: The quality of enterprise will depend on how well it is able to
satisfy and expand demand in the economy in cost-effective and innovative ways
Quantity of factors of production:
● Land: Since, the amount of land in existence stays the same, it’s supply is said to be
fixed. But in relation to a country or business, when it takes over or expands to new
area, you can say that the supply of land has increased, but the supply is not
depended on it’s price, i.e. rent
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● Labour: The supply of labour is depended upon the number of workers available
(which is in turn influenced by population size, no. of years of schooling, retirement
age, age structure of the population, attitude towards women working etc) and the
number of hours they work (which is influenced by number of hours to work in a
single day/week , number of holidays, length of sick leaves, maternity/paternity
leaves, whether the job is part-time or full-time etc)
● Capital: The supply of capital is dependent upon the demand for goods and services
and how well businesses are doing. It can be quickly adjusted to demand in the
economy
● Entrepreneurship: The supply of enterprise is dependent on entrepreneurial skills
(risk-taking, innovation, effective communication etc), education, corporate taxes (if
taxes on profits are too high, nobody will want to start a business), regulations in
doing business and so on.
Scarcity/BasicEconomic Problem
Scarcity - When there are not enough resources to satisfy our wants and needs.
Basic Economic Problem “ Wants are unlimited (Infinite) and resources are limited (finite).
Production: Process of converting raw materials into finished or semi-finished products.
Producers: The people and organizations which make and sell goods and services
Scarce Resources: There are only a limited number of resources such as workers, machines,
factories, raw materials etc. Yet there are a number of different ways in which they could be used.
Needs and Wants : Wants are desires for goods and services we would like to have but do not
need. Many wants may seem like needs; examples - Mobile Phone, Computer, Car etc. Needs are
a special kind of want, and refer to things we must have to survive, such as food, water, and
shelter.
Renewable and Non-Renewable Goods: Renewable resources are commodities such as solar
energy, oxygen, biomass, fish stocks or forestry that is inexhaustible or replaceable over time
providing that the rate of extraction of the resource is less than the natural rate at which the
resource renews itself.
Non-renewable Goods cannot be renewed. For example with plastics, crude oil, coal, natural gas
and other items produced from fossil fuels, no mechanisms exist at present to replenish them.
Economic Goods and Free Goods: Economic goods are those which are scarce in supply and so
can only be produced with an economic cost and/or consumed with a price. Or in other words, an
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economic good is a good with an opportunity cost All the goods we buy are economic goods,
from bottled water to clothes.
Free goods, on the other hand, are those which are abundant in supply, usually referring to
natural sources such as air and sunshine.
Consumption: Consumption means using up of goods and services to satisfy human wants and
needs.
Economic Exchange: Economic behaviour involves the exchange of one scarce resource for
another. When people engage in paid work, they exchange their scarce time, effort, and skill for
income, and, when people make purchases, they exchange their scarce income for scarce goods
and services. Economic activity is driven by the need to exchange.
Consumer Goods and Capital Goods: Consumer good is an economic good that satisfies an
immediate consumer need or want. Consumer goods are classified into “Durable and
Non-durable goods” - Where durable goods last for a long time (Eg: Washing machine,
televisions etc.) and non-durables are perishables or used up quickly (Eg: a Chocolate, a drink etc.
Capital Goods are the man-made resources used in the production of other goods and services
(Eg: Drills, machines, power stations, lorries etc.)
*Check your understanding:
Fill in the blanks:
1. The economic problem means that people have to make…………………….. .
2. Most land is …………………….. mobile but geographically …………………..
3. ……………………..is the payment that labour receives whilst…………...is the payment that
entrepreneurs receive.
4. A country’s labour force can be increased by ………………..the retirement age and
……………. the school leaving age.
5. A key role of an entrepreneur is to bear…………. risks.
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Choose the right answer:
1. What would cause an increase in the problem of scarcity?
A. A reduction in resources
B. A reduction in wants
C. A rise in productivity
D. A rise in the mobility of resources
2. What is meant by investment in human capital ?
A. Encouraging immigration of people of working age
B. Paying bonuses to workers to encourage them to increase their output
C. Spending money and time on educating and training workers
D. Upgrading the machines
3. Which item is a factor of production?
A. The food a farmer produces
B. The satisfaction a farmer gains from his work
C. The tractor a farmer drives
D. The wages a farmer pays his workers
4. Which form of air is an economic good?
A. Air at ground level
B. Air from an air conditioning system
C. Air above an ocean
D. Air in a tropical rainforest
5. What is meant by “Labour” in economics?
A. Hard physical work used to produce manufactured goods
B. Human mental and physical effort used in producing goods and services
C. Natural resources used in the production process
D. Risk taking and organising the factors of production
Answer the following question:
1. What is meant by scarcity? [2 Marks]
2. Explain the concept of “ Mobility of labour”. [4 Marks]
3. Analyse the factors that affect the quality of different factors production. [6]
4. Read the case given below and answer the questions;
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“ A German travel company decides to stop selling holidays in Italy and instead to offer
holidays in a new destination. This is the Maldives, a group of islands in the Indian Ocean,
famous for their long hours of sunshine and sandy beaches”.
a) Identify a free good from the passage. [1]
b) Explain the difference between Economic Good and Free good. [4 Marks]
c) Using examples , Identify three factors of production involved in providing holidays
in the maldives. [6 Marks]
1.3 & 1.4 - OPPORTUNITY COST & PRODUCTION POSSIBILITY CURVE
The scarcity of resources means that there are not sufficient goods and services to satisfy all our
needs and wants; we are forced to choose what we want. Choice is necessary because these
resources have alternative uses- they can be used to produce many things. But since, there is only
finite resources, we have to choose.
Definition: When we choose something over the other, the choice that was given up is called the
opportunity cost. Opportunity cost, by definition, is the next best alternative that is
sacrificed/forgone in order to satisfy the other.
Example 1: the government has a certain amount of money and it has two options: to build a
school or a hospital, with that money. The govt. decides to build the hospital. The school, then,
becomes the opportunity cost as it was given up. In a wider perspective, the opportunity cost is
the education the children could have received, as it is the actual cost to the economy of giving up
the school.
Example 2: you have to decide whether to stay up and study or go to bed and not study. If you
chose to go to bed, the knowledge and preparation you could have gained by choosing to stay up
and study, is the opportunity cost.
PRODUCTION POSSIBILITY CURVE DIAGRAMS (PPC)
Because resources are scarce and have alternative uses, a decision to devote more resources to
producing one product means fewer resources are available to produce other goods.
A Production Possibility Curve diagram shows this, that is, the maximum combination of two
goods that can be produced by an economy with all the available resources.
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The PPC diagram above shows the production capacities of two goods- X and Y- against each
other. When 500 units of good X is produced , 1000 units of good Y can be produced. But when the
units of good X increases to 1000, only 500 units good Y can be produced.
et’s look at the PPC named A. At point X and Y it can produce certain combinations of good X and
good Y. These are points on the curve- they are attainable given the resources. Th economy can
move between points on a PPC simply by reallocating resources between the two goods.
If the economy were producing at point Z, which is inside/below the PPC, the economy is said to
be inefficient, because it is producing less than what it can.
Point W, outside/above the PPC, is unattainable because it is beyond the scope of the economy’s
existing resources. In order to produce at point W, the economy would need to see a shift in the
PPC towards the right.
Outward and Inward shift of PPC
For an outward shift to occur, an economy would need to:
● discover or develop new raw materials. Eg : discover new oil fields
● employ new technology and production methods to increase productivity
● increase labour force by encouraging birth and immigration, increasing retirement age etc.
An outward shift in PPC, that is higher production possibility, will lead to economic growth.
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In the same way, an inward shift can occur in the PPC due to:
● natural disasters, that erode infrastructure and kill the population
● very low investment in new technologies will cause productivity to fall over time
● running out of resources, especially non-renewable ones like oil or water
An inward shift in the PPC will lead to the economy shrinking.
How is opportunity cost linked to PPC?
Individuals, businessmen and the government can calculate the opportunity cost from PPC
diagrams. In the above example, if the firm decided to increase production of good Y from 500 to
750, it can calculate the opportunity cost of the decision to be 250 units of good X (as production
falls from 1000 to 750). They are able to compare the opportunity cost for different decisions.
(TRY THIS QUIZ ONLINE!!) -
https://www.economicsonline.co.uk/Quiz/Quiz-production-possibility-frontiers.html
(See the PPF below and identify the opportunity cost!!)
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To sum it up, check the Mind Map given below;
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Check your understanding:
Choose the right answer:
1. The Norwegian government chose to spend the profits from oil, on stocks, bonds and
property. The possibility of improving domestic infrastructure, therefore, was not taken.
Which economic concept does this best illustrate?
A. Cost of production
B. Finite resources
C. Opportunity cost
D. Production Possibility Curve
2. The diagram shows a production possibility curve for an economy.
Which point on the diagram is the most efficient for the economy to produce both
consumer goods and capital goods?
3. The diagram shows a production possibility curve for cars and furniture.
A recession causes a decrease in production in both cars and furniture. Which
movement would present this change?
A. X to W B. X to Y C. Z to W D. Z to Y
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Answer the following questions:
1. The UK government decided to host the London Olympics in 2012. Explain the term
“Opportunity Cost” referring to the case given. [ 4 Marks ]
2. Analyse the factors that affect an outward shift of a production Possibility curve of an
economy. [6 Marks]
3. Analyse, using a production possibility curve diagram (PPC), the effect of the destruction
of
some of its resources on an economy. [6]
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