Economics problems

Other decisions on economic problems centers round the two basic concepts, scarcity is useful to understand them more clearly.

Scarcity

The scarcity implies limitlessness in supply therefore; when we say the resources of a country are scarce it means that the resources are limited in supply.

A resource is said to be scarce when there isn't enough of it to satisfy all the people's wants, but if;

• Economic goods and services are scarce in the sense that is not available in sufficient of zero prices. If something is so abundant that we can have all we want without paying for it is not a scarce commodity e.g. Air under ordinary circumstance is not scarce.
• Economic goods and services are scarce relatively to the people's desires for them e.g. There are more good bananas than bad banana, but it is good bananas which are scarce because it is the good one which people desire to consume.
• The scarcity of economic goods and services arises from scarcity of resources such as land, labor, capital and entrepreneur used to produce them.

NOTE

Regarding the problem of scarcity we must be very clear in our minds that it is found in all countries whether it may be poor or rich country. However the form scarcity here is used in relative sense of resources is limited in relation to man's wants. In this sense if it is true for a rich and developed country thus scarcity is a fundamental problem and universal in nature.

Because of scarcity in resources, we must choose from among the many wants and whenever we choose we must force go satisfying. Some economists defined economics as a study of how people choose to use their scarce resources in attempt to satisfy their unlimited wants. Since there are insufficient productive resources in the world, therefore man is left to find the solution to that problem and the first option is to economize, that is to make the best and efficient use of the resources available without any wastage.

Is a sort of list of all unsatisfied wants arranged in the order of importance. In the scale of preference the most pressing wants are placed on top while the less pressing wants are placed at the bottom.

If has been observed that in reality, scarcity leads to the problem of choice and once we choose we must go without others.

Satisfaction of one's must involve foregoing something else. Therefore the opportunity cost of real cost of satisfying any wants is the alternative that has to be foregone in order to do so.

That is the real cost of satisfying anything in the alternative that has to be forgone. In simple language opportunity cost is the sacrificed alternative in deciding to do one thing and not the other.

Human wants are unlimited while the means to satisfy them are limited. Therefore one has to choose what want to satisfy because one cannot satisfy all wants due to scarcity of resources.

Usually one satisfies the most pressing wants before satisfying the less pressing wants.

The sacrificed goods are thus the real cost or opportunity cost of satisfying the wants that are sacrificed.

E.g. If you had to choose between leisure and work, sacrificing leisure then the real cost or opportunity cost is very useful in the process of planning especially in the question of resources allocation. When we choose to allocate more resources to production of consumer goods we are necessarily forced to reduce the allocation of resources to the production of producer/ investment goods.

A production possibility curve is a curve representing all possible combinations of total output that could be produced by the economy when its resources were fully and efficiently utilized under a given state of technology.

The production possibility curve is also known to other economist as production possibility frontier or Boundary.

The concept of production possibility curve helps to explain the concept of scarcity and opportunity cost.

The following are the assumptions of the production possibility curve;

1. The resources are fully and efficiently utilized.
2. There is a constant state of technology.
3. Only two commodities are being produced.
4. The amount of resources is fixed.

Given that the resources and technology are fixed, we can produce more of every commodity from the resources which can be used to produce more of another commodity.

In the production possibility curve, since the resources are scarce, we are forced to choose between production of capital goods and consumer goods. Sacrificing the production of consumer goods. Thus the opportunity cost of more capital goods is the consumer goods that we have to sacrifice.

Graph of production possibility curve

From the graph, we learn that the shape of the production possibility curve is concave to the origin. Because there must be the decrease in output of guns in order to add more unit of butter e.g. To produce one unit of butter we have to fore got one unit of gun i.e. from A to B.

This is called the marginal rate of technique substitution of butter for gun and it goes on increasing.

If the economy devoted all its resources to the production of gun it can produce 15 thousand guns but the production of butter will be zero.

Therefore if we decide to produce 1unit of butter we have to produce 14 units of guns.

From the graph therefore we learn that if butter we want to produce more butter we have to reduce the output of guns and vice versa i.e. we can transform guns into butter or butter into guns.

The point on the boundary of PPC i.e. A, B, C, D, E and F represents the combination of goods that can be produced using the country's available resources and technology.

Any point inside the boundary say K is one from the diagram it shows inefficiency of which may be underutilization or unemployment of the countries resources.

From point A to point F, it indicates the increase in the production capacity of the economy. The new graph tells us that economy can now produce large quantity of output.

Point H on the graph indicates unattained point of which it is outside the PPC .point K will be attained when the economy increases its production leading to the shift of the PPC from its original position to point K.

• How choice, opportunity cost and scarcity are shown on the PPC.

Choice is indicated by selecting any point on the PPF. When resources are fully utilized i.e. a, b, c, d, e and f.

Opportunity cost is indicated by movement along the PPF i.e. a, b, c, d, e and f. e.g. The opportunity cost of producing 15 units of guns is the 0 unit of butter that you forego at full employment of the resources.

Scarcity is indicated by point H which has not been attained. It will depend on the expansion of the production in the economy.

In order to move the economy from the current production possibility curve to the outer production possibility curve, the economy has to;-

1. Increase in the stock of its resources i.e. To increase the quality of labor, land, capital and entrepreneurship.
2. Improve the state of the technology to more advanced methods in order to find move output of maximum cost of production of capital.

Diagram for innovation of new resources

In some other cases the PPC curve tends to shift inwards, this signifies the decline of the economy which may be due to;-

1. Exhaustion of the economy's natural resources such as land.
2. Working population is falling.
3. Technology available was changed.
4. Underemployment of the resources of a country of which some of the resources are left idle.

Shapes of production possibility curve

The graph is concave to the origin due to the law of diminishing return, as resources are transformed from goods A to goods B the extra out of B becomes successively smaller while the amount being sacrificed in A becomes large and large.

Amount sacrificed for one good and gained by the other is constant represented by a straight line.

Features of production possibility curve

1. Two commodities involve.
2. There is fixed technology.
3. Full employment and productive efficiency.
4. Fixed resources.
5. Perfect factor substitution.

Shifts in production possibility curves

An economy's production potential is constant changing. The Production possibility curve (ppc) will shift outward to the right because capacity to produce goods and services increases as shown below

Improvement of goods and services lead to the increase of Quality and Quantity, Labour force, stock of capital goods (offices, factories, transport network power station and machinery) an increase in technical knowledge and improvement in training.

PPC INWARD TO THE LEFT as shown below: -

PPC curve shift to the left because economy's production potential declines. This could occur due to the war or natural disaster which reduces a countries resources.

A changes in the slope of the production possibility curve (PPC)

If changes occurred of one type of goods (BUTTER) the slope of the curve will change because of changes of quality or quantity of resources

example improvement of production technique in manufacture.

The economist of today is indebted to the historian of the part history. I.e. in this sense that they supplied material of the formulation of economics conclusion.

1. ECONOMICS AND HISTORY

   • The economist of today indebted to the historian of the part history i.e. the sense that they supplied material of the formulation of economics conclusion.
   • Economists also can verify the correction of the old theory by comparing facts of the past and present.
   • Economists like Malthus used history methods to explain his theory of production.
   • No historian can have a rough knowledge of history of a country if he does not study its economic condition from this sense. Therefore economics without history has no root and without economics it has no fruits.

2. ECONOMICS AND PSYCHOLOGY

   • Psychology is that science of mind that it does with mental phenomena. Economics is the study of certain types of human behaviour. Since behaviour is conditioned by the mind, economics is related to psychology.
   • Wants, efforts and satisfactions which force the subject matter of economics are also mental phenomena e.g. the law of demand and supply are based on human behaviour /psychology.

3. ECONOMICS AND ETHICS

   Ethics is a science proper or right conductor. It prescribes the moral code of behaviour and it is concerned with what might be?

   The ethical standard of the people of a country is influenced by some extended economic condition, for example; the decision on which taxes to impose and which scheme to spend government money deceive their inspiration from morals of the society.

   Economic as system that institutional arrangement.

4. ECONOMIC SYSTEM

   Economic system is that an institutional arranged whereby human and natural resources of an economy cooperate with each other to produce goods and service.

   OR

   Is a set of institution which a society decides what, how and for whom to produce. It is a framework theory which a society allocates scarce resources among competition uses or it is an allocate mechanism of the society.

1. To distribute output among the members of the societies and it must answer the question of who gets from the production of output.
2. Allocation of the resources i.e. every system is responsible for the allocation of resources for production of goods and services.
3. To provide maintenance and expansion of capital goods. Every system must expand capital goods.
4. To adjust production and consumption i.e. to make sure production does not exceed consumption and vice verse.
5. To make social choice i.e. to decide on behalf of the government what kind of goods and services to produce.