O Levels

Topic: BASIC
ECONOMIC
PROBLEM

Fahad Munaf Parekh

 Basic Economic Problem

Basic Economic Problem Nature

* of economics

UnlimitedWants
limited
resources

Scarcity (Shortage ofresources)

Chixe
Opportunity
Cost Nextbestalternative

forgant
Economic Agents
#

produce
*

CONSIUMCN government

GoodyGoodCarital
Good
consider SassidyPuliis
Good s

Factorsofproduction Eg CostRewards

1) Land: Naturalresource Farmland Dent

-

2) Labour: Human resource Skilled labour Wages

-

3) Capital: Man made resource MachineryInterest -

4) Entrepreneur: Owner/RiskTaker - -

Profits

1) Factors production
of are resources involved in production ofgoods and

services andtheyare Types. Land

of is a natural resource which includes

farmland for which we pay rent, labour is a human resource which includes

skilled labour for which we pay

wages. Capital is a man made resource

for
which includesmachinery which we interest.
pay
1) Basic Economicproblem thatour
is butto satisfythem
wantsare unlimited

an haslimited
economy which
resources resultsin scarcity, shortage
of resourcesso economic agentsare required
to make choice
a thatis

the real costo fchoosing

one notanother
thing and thatisthe next

bestalternative forgone

1 Economic goodisa good which islimited

in supply such as oil, bouses and
(aπS

1) Free goodsisa good

which isunlimited
in supply
such sunshinesrain
as

waterand
and there is
no tocharge
way for itandincurs no opportunitycost

1) Goods are tangible and

physical itemssuch toothpaste.
table,clothing and
as

1 servicesare intangible and

n on physical items such as hairdresser and
lawyer

1 wantsa re goodsandservices thata re notnecessaryfor survival and

needsare essential for survival

Primarysectoris sector which

↓ a is with extraction ofnatural
concerned resources

Eg.. Fishingand
coal reining

↓ Secondarysector involvesmanufacturing ofproducts

provided bythe
primarysector. Tyre manufactured
Eg.. Buildingcompaniesand

) Teribarysector involvesprovided directconsumers Eg. Hairdresser

services to

teacher
and
1) Factors production
of are resources involved in production ofgoods and

services andtheyare Types. Land

of is a natural resource which includes

farmland for which we pay rent, labour is a human resource which includes

skilled labour for which we pay

wages. Capital is a man made resource

for
which includesmachinery which we interest. Entrepreneur is the
pay

owner and riskfalser who combinesall F00'sand gets profitin return as

rewards

1 Opportunity
costis the real costofchoosing one thing and
notanother that

the nextbestalternative
is forgone
 Production PossibilityCurve

* Production Possibility Curve

*
Good hood
y

combinationsofoutputthatan economycan
*
produce with
it'sgiven resources

Y(a),y)
Good 1) Thiscurve isknown as production possibility
curve or production possibilityfrontier or boundary
ofan economy.

↓ An can
economy operate within thisboundary

3
aoggXy)
⑧

GoodY(k)y) Distinction 99

A ·f Mnattainable Point-Shortagescarcityofresources
*

PotentialAgrade
·a
*

·b Pointsonthe curve -

·L ↓
· Efficientallocationofresources
Barade
Nastage ofresources
·

No

Full Employment
⑧ B GoodX(a)y)

Points inside the curve Actual

* i.e. currentsituation
of
Mndevallocation resources

Inefficiency/Wastage ofresources

Unemployment
#) Case #1. Actual isincreasing

Goody (05y)
Astmal↑ Actical ↑
Reason: ↓
A
Consumption ↑ Efficientallocation ofresources
↑ ↓
a
Investment
·

b
Government ↑ of
·

*
*
xc
d
Exports↑
Nastage
ofresources
Unemployment ↓
.

nd1↑
n
Donguun: Actual reachespotential Inflation
⑤ B GoodX
(afy) *
shortage ofresources Prices
*

*Case #1: Actual is decreasing

Goody (05y) Actual d Actual
Reason: ↓
A
Consumption Efficientallocation of resources
Investmentd ↓
· a

b
Government ↑
·

·
(

d
Imports
Nastage
ofresources
Unemployment*
.

2
Actual
·

5x Actual reachesorigin Deflation

⑤ B GoodX
(afy) *
Supplies ofresources - Pricesto
A) Case 3: · Potential is
increasing

(200dy(() y) Potential ->PPC RightwardsPotential

C
shift.
A
Reasons:
1

capacity↑
Productive

Discoveryo fNatural resource

Technological Advancement outou ,/aDP

Labour Productivity
7 Immigration ofworkers Economic Growth

Imports
① B D GoodX
(a)y)

* Case #7:Potential is
decreasing

Potential -> Potential

200d y(05y) PPC
A
shift.
C * Reasons: Productive capacity d
Depletion Natural
of resource

No Technological Advancement outon ,aDP

Rise in price energy
of
⑰

Immigration ofworkers Negative Economic

*
Export Growth
① D B Good
1a(y)
*Case #5: PPC curve linkwith Opportunitycost

GoodY(05y) GoodY(05y)

:
A

-"gy)is
"

X-B

YI
A ·

> xf B Good X > 10

200 Good X
⑪ *
(aty) (aty)
/ Production possibility curve shows the combinations of outputs that an economy can

produce with it 's given resources . All the points on the curve la ol) represents potential
-

that is efficient allocation of resources where there is full employment and no wastage
of the optimum situation for
" '
resources it is an economy The .
point e inside the

production possibility curve represents actual that is the current situation which represents
inefficiency that is under allocation of resources which results in wastage of resources

" "
and unemployment .
The point f outside the production possibility curve is unattainable

point which an economy cannot produce with it 's given resources which results
in shortage of resources that is scarcity .

/ This elaigram shows an increase in actual which can be due to increase in Consumption ,

Investment and Government Expenditure which will increase the current situation of
the economy tht is there will be efficient allocation of resources which results in

less wastage of resources and low unemployment This .

increase in actual will be

beneficial to the economy in the short-run in terms of multiplier effect that is income ,

output and employment hill keep on increasing but will result in Hyper inflation in

the long run where prices are only increasing with no change in real income as resources

gets fixed when actual reaches potential .

/ This elaigram shows an xdedirease in actual which can be due to increase in Consumption ,

Investment and Government Expenditure which will worsen the current situation of
the economy tht is there will be inefficient allocation of resources which results in

wastage of resources and there is unemployment . This clear ease in actual will be

beneficial to the economy in the short-run in terms of deflation as prices will be falling .

but in the longrun will result in downward multiplier effect that is income, output and
employment keeps on decreasing and the economy will wave into recession that is

downturn in economic cycle .

1 Thisdaigrain
shaws an increase in potential from AB to (p
the economy
of

which will increase the productive potential ofthe due to

economy
of
discovery
natural resources,immigration ofworkers thatis technological
imports ofworkers and
advancementresulting in economic growth.

1 Thisdaigrant showsa n decrease in potential from AB to CD

the economy
of

which will reduce the productive potential ofthe due to depletion of

economy

natural resources,emmigration ofworkers thatis imports ofworkers and

rise in price
of energyresulting
in negative economic growth.

1 opportunitylostis the real costofchoosing one thins another thati s

and not

the nextbestalternative forgone. This daison shows the concentofopportunitycost

in relevance to the production possibility c urve as the countryis operatingatcurve
AB the
and countryhas two options eitherto consume Good or Gordy. Ifthe

countrydecides to produce Goodyfrom 0 to yo so will have to forgoes word *

from *x&to B as per the conceptofmicro economies.