AHSEC Class 12 Economics Notes Chapter- 01 Microeconomics

Question 3: Discuss the central problem of an economy.

Solution: Every economy faces three central problems due to Unlimited Wants, Limited availability of resources and alternative use of resources. The central problem of an economy are as follows:

1.  Unlimited Human wants.

2.  Limited or scarce economic resources.

3.  Alternative use of scarce economic resources and, hence, the problem of choice or selection.

4.  Allocation of productive resources and distribution of output produced.

5.  Economic Development to enhance human welfare.

Problem of allocation of resources:- Every economy has limited resources which can alternatively be used for producing different goods and services. Every economy has to face three problems with which we can allocate resources.

1. What to produce:- It is the problem of choosing the different items of goods and services and the quantities with the available resources. Whether to produce consumer consumer goods or capital goods; agricultural goods or investment goods;  whether to cater the education and healthcare sector or to strengthen the country’s military. Onceit is decided what to produce, the next decision is to estimate the amount or quantity of the production. For example if an economy decides to produce more wheat and cloth within a given period of time , it will have to produce less machines due to the limited resources available.

2. How to produce:- This problem relates to the choice of technique i.e labour intensive or capital intensive.

(a) Labour Intensive technique (LIT):-  The labour intensive technique would employ relatively more labour and less capital. With labour intensive technique, employment can be generated.

(b) Capital Intensive technique (CIT):-   The Capital intensive technique means more capital and less labour. It Produces goods on a large scale using high technology.

An economy should adapt that technique which gives maximum production at minimum cost and best use of limited resources. Developed countries use capital intensive techniques whereas developing countries use more labour intensive techniques.

3. For whom to produce:- This problem refers to selection of the category of people who will ultimately consume the goods i.e, the distribution of final goods and services. 

     It is the problem of deciding whether to produce for a low income group or high-income group. It depends on the level and distribution of income and wealth. The objective behind such a mechanism is to reduce inequality of income , to reduce poverty and to add to the social welfare and standard of living of people.

This problem can be categorised under two heads:

1. Personal Distribution: It means how national income of an economy is distributed among different groups of people.

2. Functional Distribution: Functional Disrtibution refers to deciding regading share of different factors of production in the total national product of the country.

Question 4: What is the production possibility curve?

Solution: The production possibility curve (PPC) refers to a curve that shows the alternativ combination of two goods that an economy can produce with the available technology and given resources which are fully and efficiently employed. It is also called production possibility frontier.