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b a programme b com p semester i ii economics discipline specific core course in lieu of modern indian language principles of microeconomics i study material 1 1 8 school ...

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            B.A.(Programme) / B.Com (P)      Semester-I/II    Economics
                  DISCIPLINE SPECIFIC CORE COURSE /
                  In Lieu of MODERN INDIAN LANGUAGE 
                        Principles of Microeconomics I
                               Study Material : 1 (1-8)
                       SCHOOL OF OPEN LEARNING
                                University of Delhi
                              Department of Economics
                           Editor : Dr. Janmejoy Khuntia
                                                                                   Graduate Course 
                      DISCIPLINE SPECIFIC CORE COURSE / In Lieu of 
                                    MODERN INDIAN LANGUAGE 
                                         Principles of Microeconomics I 
                                                 CONTENTS 
                 Lesson 1   :   Problem of Scarcity and Choice 
                 Lesson 2   :   Demand 
                 Lesson 3   :   Elasticity of Demand 
                 Lesson 4   :   Supply and Elasticity of Supply 
                 Lesson 5   :   Determination of Equilibrium Price and Quantity 
                 Lesson 6   :   Some Applications of Demand & Supply  
                 Lesson 7   :   Theory of  Consumer's Demand 
                 Lesson 8   :   Indifference Curve analysis  
                 Editor :  
                 Dr. Janmejoy Khuntia 
                                    SCHOOL OF OPEN LEARNING 
                                                 University of Delhi 
                                           5, Cavalry Lane, Delhi-110007 
                                                                      LESSON: 1 
                                                  PROBLEM OF SCARCITY AND CHOICE 
                     INTRODUCTION 
                            Institutionalized  behaviour  pattern  of  man  with  regard  to  production,  distribution  and 
                     consumption of wealth or the material means of satisfying human desires, is the distinguishing mark 
                     of a particular economic system. But at the foundation of any such system, there will always be 
                     found  a  few  universal  economic  conditions.  Although  each  economic  system  has  its  own 
                     peculiarities, yet certain basic economic problems are common to all. 
                     Learning Objectives 
                     After going through the lesson, you will be able to 
                          1.  Know and analyse the central problems facing the economies of the world 
                          2.  Explain the concept of opportunity cost and its different types 
                          3.  Draw the various shapes of Production Possibility Curves (PPC) 
                          4.  Understand the role and limitations of price mechanism 
                          5.  Realise the importance and role of government 
                     1.1   THE THREE CENTRAL PROBLEMS OF AN ECONOMY 
                            There would not be existence of any problem if resources were unlimited, and an infinite 
                     amount of every good could be produced. The question of choice arises directly out of the scarcity 
                     of resources. The human wants that can be satisfied by consuming goods and services may be 
                     regarded, for all practical purposes, in today’s world as limitless. In relation to the known desires 
                     of individuals (for better food, clothes, housing, schooling entertainment and the like), the existing 
                     supply of resources is highly inadequate. 
                            Suppose a society possesses unlimited resources in the form of land, labour and capital 
                     equipment. There will then be no economic problem because the economy can produce enough 
                     goods and services to meet all the wants of persons, individually as well as collectively. There 
                     would then be no economic goods, i.e., no goods that are relatively scarce. And there would hardly 
                     be any need for a study of economics or economizing. All goods would be free goods, like air, sun-
                     shine and rain water. But in reality, it is possible to produce only a small fraction of the goods and 
                     services that people desire. 
                     Any society, whether simple or complex, advanced or backward, free or controlled must somehow 
                     confront three fundamental, interdependent and central economic problems given below: 
                            (1)    What goods and services shall be produced and in what quantities? This is called the 
                                   problem of what to produce? 
                            (2)    How will these goods and services be produced, i.e., by what method or technology 
                                   and with what resources? This is called the problem of how to produce? 
                            (3)    How will the goods produced be allocated among the members who make up the 
                                   society, i.e., whom are the goods produced for? This is called the problem of for whom 
                                   to produce? 
                     Let us discuss these problems and their solutions. 
                      
                                                                            1 
                      
        The Problem of What to Produce 
          We know that resources can be used to produce more than one type of commodity. But the 
        point to note is that the same unit of the factor/resource cannot be available simultaneously to all 
        the activities for which it is useful. For example, a unit of labour can be employed either on a piece 
        of land for agriculture, or for a factory building or housing. Therefore, the community must choose 
        which activity to pursue from amongst the different activities. Choosing an activity further implies 
        that other alternate activities have to be sacrificed. If a factor unit such as labour or combination of 
        factors of production is used to produce one commodity, say steel, then you will have less of some 
        other commodity, say, food grains. Similarly, if the community decides to consume more now, it 
        will have less for the future, i.e., for the production of capital goods and machinery-which can 
        produce more consumers goods in future. The question what goods, to produce and what not to 
        produce, therefore, concerns the allocation of scarce resources among alternative uses. 
          For resource allocation, one needs two sets of information. One, the wants of the people 
        should be known with their preference intensifies. In other words, for a rational allocation of 
        resources a society must set priorities among their needs. Second, information regarding production 
        possibilities  of  different  commodities  with  the  given  resources  ought  to  be  available.  Such 
        information is summarized in the production possibility curve.  
        The Problem of How to Produce 
          The second problem concerns the organisation of resources, i.e., choice of technique. This 
        question  arises  whenever there is more than one technically possible  way to produce goods. 
        Agricultural commodities, for example, can be produced by farming a large area of land while using 
        small  quantities  of  inputs  like  fertilizers  and  machinery  or  by  farming  a  small  area  of  land 
        intensively, using large quantities of inputs such as fertilizers, labour and machinery. Both methods 
        can be used to produce the same quantity of some commodity. One method economizes on land 
        and uses large quantities of other resources, the other makes use of a large area of land and 
        economizes on capital. Similar possibilities are available in the industrial sector also. It is usually 
        possible to have the same output by several different techniques, ranging from highly labour 
        intensive techniques using large quantity of labour and a few tools, to those using a large quantity 
        of highly sophisticated machinery and only a very small number of workers commonly referred to 
        as capital intensive technology.  
          Several considerations are made before choosing whether to use labour intensive or capital-
        intensive technology. One, a choice is open only to the extent one factor is substitutable for another. 
        Two, factor costs are another important consideration. Firms or producers normally look for least-
        cost combinations of factors to produce certain level of output.   
        The Problem of For Whom to Produce 
          The third problem concerns the distribution of the national product among the members of the 
        community. Since an economy can produce only a limited amount of goods and services (because 
        of the resource constraint), it is not possible to meet all the demands of all the people. This poses 
        before the community the problem of choosing criteria for allocating this limited amount of goods 
        and services amongst various individuals and groups. In other words, the economy must decide as 
        to who will share the limited output and to what extent, and who will go without it.  
          As we know that the value of national product is called national income, the problem of for 
        whom to produce concerns distribution of national income in various forms such as wage, rent, 
        interest and profit. It is well-known that in the process of generation of income through production 
        of goods and services, the factors of production are compensated for factor services rendered. 
        Accordingly, wage is given for labour service, rent is paid for services of land and building, interest 
        is earned for lending capital and profit accrues to the entrepreneurial efforts made during production 
                           2 
         
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...B a programme com p semester i ii economics discipline specific core course in lieu of modern indian language principles microeconomics study material school open learning university delhi department editor dr janmejoy khuntia graduate contents lesson problem scarcity and choice demand elasticity supply determination equilibrium price quantity some applications theory consumer s indifference curve analysis cavalry lane introduction institutionalized behaviour pattern man with regard to production distribution consumption wealth or the means satisfying human desires is distinguishing mark particular economic system but at foundation any such there will always be found few universal conditions although each has its own peculiarities yet certain basic problems are common all objectives after going through you able know analyse central facing economies world explain concept opportunity cost different types draw various shapes possibility curves ppc understand role limitations mechanism rea...

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