Module - 1 B to C shows long term economic growth.

PPC also used to explain

- Basic concepts - Economic Resources opportunity cost.
- Economic Systems - Production & Productivity
(Resource Allocation)  The relationship between Scarcity, Choice and Opportunity cost
Human wants are unlimited, but resources are scarce. Scarcity means that not
enough resources to satisfy everyone’s’ wants. It is a worldwide problem. It is the
 Microeconomics is a branch of economics which examines the behavior of basic central economic problem. Due to scarcity, we are forced to make a choice. Choice in
elements in the economy, including individual agents such as households and terms of what to produce, how to produce and for whom to produce. When we make
firms, markets and their interactions. a choice, we sacrifice something to obtain the best. What we sacrifice is the
opportunity cost. Therefore, Opportunity cost is defined as the sacrifice of the next
 Macroeconomics is a branch of economics which involves the sum total of
most desired alternative. Consumers, firms, and governments have to make a choice
economic activity, dealing with the issues of economic growth, inflation, and
unemployment and government’s policies. It is a branch of economics dealing with and therefore there will be opportunity cost.
the performance, structure, behavior, and decision-making of an economy as a
Economic Resources
whole, rather than individual markets.
 Free goods: Free goods are those goods which are gift of nature, do not have an
opportunity cost, unlimited in supply, no cost of production and so we don’t have Natural Resources Human Resources Manufactured Resources
to pay a price to obtain them. Eg: Sand in the desert, Ice in the Polar region, etc. (Land) (Labour) (Capital)
(Entrepreneur)
 Economic goods: Economic goods are those goods which are man-made, have
an opportunity cost, have a cost of production, limited in supply, and we have to
pay a price to obtain them. Eg:-Electricity, computer, desalinated water, TV, etc.

 Merit Goods and Services: Merit goods such as education and health Economic Resources:- Economic resources comprise human beings and all the
services that government feels everyone ought to have. But these goods and other things which we used to produce goods and services to satisfy their wants. It
services are underprovided or under consumed in a market economy. It means can be classified as natural, human and man-made or manufactured resources. (give
that low income groups are not able to afford the price charged by the private meanings of each resource) It is also called as factors of production such as land,
firms. labour, capital and entrepreneur.
 Public Goods and Services: In economics, a public good is a good that has the Factors of Productions are the economic resources which we use to produce goods
feature of non-excludability and non-exhaustibility. It means that individuals and services to satisfy human wants. They are land, labour, capital and entrepreneur.
cannot be effectively excluded from use and more use by an individual does not
reduce availability to others. Examples of public goods include fresh air, Land: The word ‘land’ means all the gifts of nature. It includes the fertility of soil,
knowledge, lighthouses, national defense, flood control systems and street minerals on the earth surface, Forests, rivers and, the riches of the sea. The word
lighting. ‘land’ means all the gifts of nature. It includes the fertility of soil, minerals on the earth
surface, Forests, rivers and, the riches of the sea. The reward for land is rent.
 Production Possibility Curve:- A Production Possibility Curve graphically shows Labour: The word ‘labour’ means human effort of all types - manual and non-manual,
the possible combinations of two goods that can be produced by the full skilled and unskilled which is done for a reward. The reward for labour is wages /
employment of resources and technology. It is also called as opportunity cost salary.
curve. Capital: Capital goods are not wanted for their own sake but they help firms to
increase their output or consumer goods. Eg:- Factories, machineries, buildings
Capital goods etc… The reward for capital is interest.
*C Entrepreneur: He is a person who organizes land, labour and capital in to units of
production and undertakes the responsibilities and risks. The reward for entrepreneur
*B is profit.
*A
Features of an Entrepreneur
0 Consumer goods  He is an organizer - He is the decision taker
 *A-productively inefficient / *B-productively efficient / *C- long run economic  He is the risk – bearer - He innovates new technique
growth. A movement from A to B shows short term economic growth. From  He rewards all the other factors of production
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MOBILITY OF THE FACTORS OF PRODUCTION o Whether they work full or part-time
The movement of factors of production is called as mobility of factors of production. o The duration of overtime
o The length of the holidays taken by workers
The mobility of Land o |the amount of time lost through sickness and illness
 It is geographically immobile
 Occupationally mobile (Land can be used for different purposes like housing,
agriculture, car parking, etc.) The quality of Labour – It can be improved by:
 Better education and training
The mobility of Labour  More experience and healthcare
The mobility of lablour varies - geographical mobility and occupational mobility . When
labours move from one place of work to another place of work, it is called as The quantity of Capital
geographical mobility. When labours move from one occupation to another The quality of capital is influenced by ‘investment’ and tends to increase with time.
occupation, it is called as geographical mobility Even if labour is mobile, they may (Note: refer the terms - Gross Investment, Depreciation, Net Investment and Negative
experience geographical and occupational immobility. Geographical immobility may Net Investment)
occur due to the following points:
 Family ties The quality of Capital
 Government restriction on the movement of workers Advancement in technology enables capital goods to produce a higher output and a
 Differences in the educational systems in different areas and countries better quality output. For example, the development of robotics in car production has
 Lack of information increased significantly the number of cars.
 Differences in the price and availability of housing in different areas and
countries The quantity of entrepreneur / enterprise
The supply of entrepreneurs can be increased by:
The mobility of Capital
The geographical and occupational mobility of capital varies according to the type of  Education and training
capital good. That is, it can be geographically and occupationally mobile as well as  Low taxes on firm’s profits
immobile.  Reduction in government regulation
 Increased subsidies for producers
The mobility of Entrepreneur or Enterprise
Entrepreneur or Enterprise is the most mobile factor of production. The skill involved The quality of entrepreneur / enterprise – It can be improved if:
in being an entrepreneur can be applied in every industry.  Entrepreneurs receive better education & training
 Better healthcare
QUANTITY AND QUALITY OF THE FACTORS OF PRODUCTION  gain more experience

The quantity of Land Labour intensive method of production:- Using more labours in relation to capital
The amount of physical land in existence does not change much with the time. Soil in production process is called as labour intensive method of production. Eg:- Postal
erosion reduces the supply of agricultural land, but the amount of land reclamation service, postal services.
increases its supply. Rainforests are currently declining at a rapid rate. Capital intensive method of production:- Using more capital or machineries in
relation to labour in production process is called as capital intensive method of
The quality of Land production. Eg:- Car manufacturing, computer manufacturing.
The quality of the land can be increased in various ways. For example, the fertility of
the land can be improved by fertilizers, the purity of the rivers and the health of the MARKET ECONOMY
fish can be improved by stopping the firms polluting the rivers. It is an economic system in which there is considerable freedom for the people to buy
what they want and sell what they produce. Eg- USA, UK, etc.
The quantity of Labour – It can be influenced by two key factors: Features of Market economy
 Number of workers available 1. Private property : - Individuals have the right to own, control and dispose of
 Number of hours for which they work natural and manmade factors of production.
2. Freedom of choice : - There is considerable freedom for people to buy
The number of hours for which they work is influenced by: what they want and sell what they produce.
o The length of the average working day
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 3. Self interest : - It encourages the people to do what is best for themselves. 3. Better co-ordination of different sectors through central planning
Firms try to maximize the profits, workers try to maximize their income, and 4. Reduces inequality in the distribution of income and wealth.
consumers try to maximize their satisfactions. Disadvantages of Planned system
4. Price mechanism :- In a market economy, changes in the demand and 1. Lack of efficiency and hard work
supply for goods and services cause changes in price. 2. Improper allocation of resources as there is no price mechanism
5. Limited role of government :- A government has very few economic 3. Restriction of freedom of consumers and workers
functions in a market economy. So it is also described as ‘free enterprise’ 4. Economic power is centralized in the hands of govt.
economy.
MIXED ECONOMIC SYSTEM
Advantages of Market system It is the combination of market economy and command economy. There exist both
1. The free market responds quickly to people’s wants- Consumers are the public sector and private sector.
king in the free market. Goods are produced and supplied according to the Eg- India, Maldives, etc.
consumer’s choice.
2. The market produces wide variety of goods and services to meet Private sector:- Private sector of an economy means all the businesses, institutions,
consumer’s wants. and organizations are owned and controlled by private individuals. Capital is provided
3. Market system encourages the use of new and better methods and by them and the aim of the business is to make profit.
machines to produce goods and services. Public sector:- Public sector of an economy means all the businesses, institutions,
4. The market system relies on producers and consumers to decide what, how and organizations are owned and controlled by the govt. Capital is provided by the
and for whom to produce and so there is n need to go to the expense of govt. and the aim of the business is to operate in the public interest.
employing a group of people to take these decisions. Features of Mixed system
5. Competition increases efficiency & prices tend to be low. 1. A large percentage of the economic resources are privately owned
Disadvantages of Market System 2. Most of the prices are determined by the market forces. At the same time,
1. Inequalities:- Accumulation of large amount of wealth by successful people the prices of certain necessary goods are fixed by the govt.
leads to inequalities. 3. Most of the industries are owned by the individuals but various industries like
2. Instability:- Market economy is subject to booms and slumps. It creates mines, power stations, etc will be run by the govt.
uncertainty about employment. 4. Co- existence of public and private ownership. Price mechanism determines
3. Dominant firms:- Due to competition, less successful firms are driven out resource allocation in the private sector and national economic plan
by more successful firms. Such firms will have greater market power which determines resource allocation in the public sector.
they could use to charge prices well above the cost of production. 5. It avoids greater inequalities in the distribution of income and wealth by
4. Social costs:- Sometimes, however, the production of a commodity some policies and practicing rationing.
imposes costs on society as a whole; these costs are not borne by the 6. Consumers will be protected by the govt. from misleading advertisement,
producer. Eg: Pollution, nuisance, etc. fraud, and harmful product.

COMMAND ECONOMIC SYSTEM Advantages of Mixed Economy

It is an economic system in which the govt. has the absolute power to own, control,  Availability of wide variety of goods and services
and dispose of natural and manmade resources. Eg- N. Korea and Cuba.  State provides essential services
Features of command economic system  Efficient resource allocation
1. Public ownership:- One of the most important features of command system  Consumer sovereignty
is the public ownership of the ‘means of production’.  Competition keeps prices low
2. Planned production:- Production is carried out according to a national plan.  Avoid wastage of resources
Resources are allocated to different uses by the government.  Social cost of business activities may be reduced by the government.
3. Prices:- Prices are fixed by the govt. in a command system. If there is any
shortage of a commodity, some form of physical rationing has to be used. Disadvantages of Mixed Economy
4. Profits:- The govt. does not aim at profit. They produce only what the govt.
 Excessive control over private business activity can add costs and discourage
thinks will be in the best interest of the people.
private enterprises.
 It is difficult to operate mixed economy because balancing both private and public
Advantages of Command system
sector is difficult.
1. Better utilization of resources through planning
2. Regulates unemployment and instability  Heavy taxes reduce incentives to work hard or make profits.

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 Public sector is often less efficient than private sector, due to the absences of  Motivation
competition.  Working condition
 Improper allocation of resources with the public sector.
Division Of Labour:- Breaking down the entire production into a large number of
small specialised task done by specialised workers.
Resource Allocation means the distribution of resources to different economic
sectors according to the priority so as to maximize the output. Advantages
 In a market economy, resources are allocated by price mechanism –
1. Division of labour makes the people to find jobs suited to their abilities and
demand (maximizing satisfaction) & supply – profit motive
interests.
 In a mixed economy, resources are allocated by price mechanism as well as
2. “Practice make perfect” – few simple movements makes the worker to do the
government directives – profit motive & welfare motive.
work with great speed and
3. For several operations in the production process, the worker have to move .
But in specialization product moves to the worker. So no time is wasted.
3 Economic sectors/ Industries/ Production
4. In specialization workers use one set of tools constantly. So no equipments
will be idle.
 Primary sector
5. By division of labour production can be mechanized.
 Secondary sector Meaning with example
 Tertiary sector
Disadvantages
 Primary sector: It is the first stage in the process of production. These
1. Constant repetition causes boredom and frustration. This leads to monotony
industries are also known as extractive industries because it extracts raw
and loss of job satisfaction.
materials directly from the nature. Eg: Agriculture, mining, quarrying, forestry,
2. Specialization leads to loss of skills. No worker can claim that “I made that”
fishing, etc.
3. Division of labour is responsible for lack of variety.
 Secondary sector: The second stages of production. It changes the raw
4. Work of certain specialized workers if become unemployed cannot be used
materials into finished or semi-finished goods. Eg: manufacturing, construction,
in other industry.
bottling milk, fish canning, etc.
5. A strike by a group of workers of a product or component can affect the
 Tertiary sector: It is the third stage in the production process. It supplies
whole industry.
services to the primary and secondary sectors. So it is known as service sector.
Eg: Education, communication, banking, transportation, etc.
Specialization: Concentrating on the production of a particular good or service by
individual, industry, region, nation, etc. Accordingly, there are different types of
specialization – Individual specialization, Industrial specialization, Regional
Sectoral changes OR Changes in employment OR Labour / Resources
specialization, and International specialization.
as a nation develops
In a developing country, major part of the labour force is employed in the Advantages:
primary sector such as agriculture, fishing, farming, etc. But as a nation develops,  Increases output
there will be a shift in the employment from primary to secondary and to tertiary. In a  Increases fame & prestige
fully developed economy, majority of the labour force is employed in the tertiary  Firms can enjoy economies of scale
sector such as health, education, banking, etc. But it doesn’t mean that the output  creates more jobs
decreases in the primary and secondary sectors. As a nation develops, there will be  generates more income & economic growth, etc.
improvements in technology and as a result, they will be using advanced
machineries. It leads to an increase in the output in these two industries. Disadvantages:
 Exploitation of natural resources
Productivity:- It is the measure of efficiency with which goods and services are
 Interdependency
produced. It is measured in terms of output per worker hour.
 other resources will be idle
Productivity = Output / Input.  lack of security, etc.
Factors influencing the productivity /efficiency of labour: #################
 Education & training
 Management No questions from Command Economic system.
 Equipments/tools
Given for understanding only.
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