Chapter 1 Basic concepts of Economics and Allocation of Resources Complete Notes| NEB

Syllabus: Content to Study

1. Introduction:
1. Scarcity and Choice
2. Opportunity Cost
2. Production Possibility Curve (PPC) / Production Frontier (PPF)
1. The Shape of Production Possibility Curve
2. The shift in production Possibility Curve
3. Allocation of Resources
1. The Problem of allocation of resources
2. How to achieve fuller utilization or full utilization of resources
3. How to achieve growth of Resources?
4. Division of Labor:
1. Concept of Division of labor with advantages and disadvantages
2. Types of division of labor
5. Specialization
1. Advantage of Specialization
2. Disadvantage of specialization
6. Economic System
1. Types of Economy

Complete Notes:

Introduction:

In economics, scarcity means there are not enough resources to satisfy everyone's wants. Since resources are limited while human wants are unlimited, people have to make choices about what they want to produce, how much to produce, how to produce, and for whom to produce. These decisions are the problem of choice. Economics is a social science that studies how people use limited resources to satisfy unlimited wants and how they make choices to maximize production.

Scarcity:

Scarcity means that there are limited resources to satisfy unlimited human wants. It's not just about things being rare or unavailable, but about the fact that we have to make choices because we can't have everything we want. This is a relative sense, meaning that resources can be scarce even if they exist in some quantity. Scarcity leads to poverty and unhappiness, but it also creates value for commodities and motivates producers to make profits. The problem of scarcity exists everywhere and won't go away as long as human wants continue to exceed the available resources.

Choice

Resources are limited, so people must make choices about which wants to satisfy. They must economize resources and prioritize their wants to obtain maximum satisfaction. Choice involves selecting goods or quantities from bundles of wants and allocating income to purchase goods and services to maximize satisfaction.

Choice refers to the process of selecting one or more goods or services from a bundle of options to maximize an individual's satisfaction or utility. This involves making decisions about which goods or services to purchase, how much to buy, and at what price.

Opportunity Cost:

Opportunity cost is what you give up in order to choose something else. It is the value of the best alternative that you didn't choose. For example, if you choose to go to the movies, the opportunity cost is the money and time you could have spent doing something else instead, like going to a concert or studying.

In economics, opportunity cost is important because it helps us understand the relationship between scarcity and choice. When resources are limited, we have to make choices about how to use them, and those choices always involve an opportunity cost. By considering opportunity cost, we can make better decisions and allocate resources more efficiently.

Production possibility Curve/ Frontier (PPC/ PPF)

The PPC is a graph that shows the different combinations of two goods that can be produced using limited resources. It illustrates the concept of opportunity cost, where producing more of one good means producing less of another. It is a useful tool for analyzing the trade-offs that must be made due to scarcity of resources.

Assumptions:

1. Only two goods are produced in an economy.
2. The factor of production is fixed.
3. There is full employment of resources.
4. Production technology is given and constant.
5. PPC runs in a sort period

PPC is a graph that shows how much of two different things an economy can make in a certain amount of time. For example, it might show how many shoes and how much butter an economy can produce. Here is a table and diagram to help you understand it better.

A	0	10
B	1	9
C	2	7
D	3	4
E	4	0

In the above table and diagram, there are different possibilities with factor combinations A, B, C, D and E. When all the resources are employed to produce shoes, then no butter can be produced in possibility A. when 1 kg of butter is produced, then only 9 pairs of shoes can be produced and so on.

When all the possibilities are connected, then we get a concave nature of curve which is known as Production Possibility Curve. The points F and G are inefficient points because they are unattainable due to limited resources and given technology. To produce at this point, the economy requires more resources or improved technology.

Shift in PPC:

A shift in the PPC represents a change in the economy's productive capacity due to factors like an increase in resources, technology, or efficiency. It can shift outward or inward, indicating economic growth or decline.

It is expressed by a function:

Q=ƒ(𝑘l, 𝑘k)

Where, 𝑘 is taken as resemblance of change of technology which results shift in PPC. PPC shift means the economy's production capacity changes due to resources or technology. Shifts can be outward or inward and are caused by positive or negative values of 𝑘. Sometimes, shifts only affect one industry, shown by an upward or rightward shift in its PPC.

Above diagram shows, shows a shift in PPC due to changes in inputs and technology in both industries.

Above diagram shows, shows a shift in PPC only in the food industry due to improved inputs or technology.

Allocation of Resources:

Allocation of resources refers to the process of distributing and using available resources, such as labor, capital, and natural resources, to produce goods and services. Allocation of resources involves addressing three major questions:

1. What should be produced?
2. How should be produced?
3. From whom to Produce?

Explanation of above questions:

What should be produced?

Human wants are unlimited, but the resources available to fulfill them are limited. As a result, the question of "what to produce" arises. This question encompasses two sub-questions: what goods should be produced first, based on priority, and how much of each good should be produced based on demand. In general, a mix of consumer goods and additional goods that are necessary for the country's development should be produced. The effective allocation of resources is essential to ensure that these goods are produced efficiently and in sufficient quantities to meet the needs of the population.

How should be produced?

Once the question of "what to produce" is answered, the next question arises: how should the goods be produced? There are two types of production technology: labor-intensive and capital-intensive.

Labor-intensive technology relies more on labor than capital for production, which creates more jobs and can help solve the problem of unemployment. On the other hand, capital-intensive technology relies more on capital than labor and can result in large-scale production.

Choosing between these two technologies depends on the resources available and the country's situation. If labor is abundant, a labor-intensive technique may be more suitable. If capital is abundant, a capital-intensive technique may be more appropriate.

 From whom to produce?

It's about how goods and services should be distributed among members of society. There are two major choices: prioritizing distribution based on necessity and living standards or based on the ability to pay or profitability. The choice depends on a country's economic goals, values, and available resources.

Problem of Full Employment:

Full employment of resources is the efficient and effective use of physical, natural, and human resources to produce maximum output with minimum effort and wastage. The main problem is achieving full employment of resources and efficient allocation of resources, which refers to the optimum combination of factors of production. The production should be done at efficient points of a Production Possibility curve (PPC), and if it is done inside the PPC, it suggests underutilization and wastage of resources. To ensure full employment of resources, better technology and a combination of factors of production must be adopted.

Limited and scarce resources cannot be wasted in any economy. Every economy strives to utilize its scarce resources by using better technology and factors of production. Therefore, achieving full employment of resources requires better inputs and technology adoption to increase efficiency in the use of available resources. The efficient allocation of resources ensures that there is no misuse or wastage of productive resources, and the optimum combination of factors of production is used to achieve full employment of resources.

How to achieve Growth of Resources?

To achieve growth of resources, an economy needs to invest in both consumer goods and capital goods. It should also invest in new technology, labor specialization, division of labor, employment of new production methods, increment in the labor force, and the discovery of new raw materials, among other factors.

One way to measure the growth of resources is to use a production possibility curve. An outward shift in the PPC indicates growth in technological resources, capital, human, and physical resources.

However, it is also important to consider sustainable growth of resources, as resources are scarce and some may be non-renewable. Therefore, increasing resources should be done while maintaining the carrying capacity of the environment.

Division of Labor:

According to Prof. Watson, “Production by Division of Labor consists in splitting up the production process into its component parts, concentrating specialized factor on each subdivision and combining their output into particular forms of consumption output required.”

As per Hanson, “Division of Labor means specialization of process.”

And, Chapman says, “The specialization of works is called division of labor.”

Advantage of Division of Labor:

1. Increased efficiency: When workers specialize in specific tasks, they can become experts and perform their work faster and with greater skill. This increased efficiency can lead to a significant boost in productivity.
2. Cost reduction: By dividing labor, companies can reduce the costs associated with training, as workers can focus on mastering a particular task rather than learning several. Additionally, because specialized workers can perform their tasks more quickly and efficiently, companies can often produce goods or services at a lower cost.
3. Increased output: The division of labor can help organizations produce more goods or services in the same amount of time. This increased output can lead to greater profits and can help organizations expand their market share.
4. Improved quality: When workers specialize in a specific task, they can become more skilled at it, leading to higher-quality output. Additionally, because each worker is responsible for a specific task, they can focus on quality control and catch errors or defects more easily.
5. Job satisfaction: Because workers are often performing tasks that they are skilled at and enjoy, they may experience higher job satisfaction. This can lead to lower turnover rates and a more positive workplace culture.

Disadvantage of Division of Labor:

1. Monotony and boredom: Specializing in a particular task can become monotonous and repetitive, leading to boredom and decreased job satisfaction. This can lead to increased turnover rates and absenteeism.
2. Reduced creativity and innovation: Because workers are only responsible for a specific task, they may have less exposure to other areas of the organization, which can limit their ability to think creatively and come up with innovative ideas.
3. Dependence on specialized workers: If a specialized worker is absent or leaves the company, it can be difficult to replace them, leading to production delays and decreased output.
4. Lack of flexibility: Dividing labor can make it difficult for workers to adapt to changing circumstances or to take on new tasks. This can limit the ability of the organization to respond to changes in the market or to implement new strategies.
5. Potential for worker exploitation: In some cases, the division of labor can lead to workers being treated as interchangeable parts rather than individuals, which can result in poor working conditions and exploitation.

Types of Division of Labor:

Division of labor are classified into there parts and they are:

1. Simple division of labor: Division of labor based on occupation is called simple division of labor. Example: Farmer, Engineer, Doctor
2. Complex division of labor: Division of labor in which entire work is divided into various steps pr process is called complex division of labor. Example: In a hospital, there are different types of healthcare professionals such as doctors, nurses, radiologists, pharmacists, and administrative staff.
3. Geographical division of labor: Geographical division of labor refers to the separation of tasks and responsibilities across different geographical locations. Example: Production of Khukuri in Bhojpur, and Production of Dhaka Topi on Palpa.

Economic System and it’s type:

An economic system is the way in which a society or country organizes its economy to allocate resources, produce goods and services, and distribute them among its members. It involves a set of institutions, rules, and practices that govern economic activity, such as markets, property rights, and government policies.

Types of Economic System:

Generally, there are three types of economic system:

1. Market Economic System
2. Socialist Economic System
3. Mixed Economic System

Market Economic System:

In a market economy, economic decisions are made by individuals and businesses based on supply and demand. Prices are determined by market forces, and the government plays a limited role in the economy.

Features of Market Economic System:

1. Decentralized decision-making: Economic decisions are made by individuals and businesses based on their own self-interest and market conditions, rather than by a central authority.
2. Private ownership: Resources, property, and the means of production are owned and controlled by individuals and businesses, rather than the government.
3. Profit motive: The pursuit of profit is a primary motivator for individuals and businesses, driving them to produce goods and services that are in demand in the market.
4. Competitive markets: The market operates based on the principles of supply and demand, with prices determined by market forces. Competition among producers helps to ensure that prices are kept in check and that goods and services are of high quality.
5. Limited government intervention: The government's role in a market economy is limited to providing a legal framework for economic activity, ensuring that markets are competitive, and enforcing property rights.
6. Specialization: In a market economy, individuals and businesses are encouraged to specialize in the production of goods and services in which they have a comparative advantage, leading to greater efficiency and productivity.
7. Consumer sovereignty: Consumers have the power to influence the market by their choices and preferences, and producers must respond to consumer demand to succeed in the market.

Socialist Economic System:

A socialist economy is an economic system in which the means of production and distribution of goods and services are owned and controlled by the state or by the workers themselves, with the goal of promoting social welfare and reducing inequality.

Features of Social Economic System:

1. Public ownership: The means of production, including land, natural resources, and capital, are owned and controlled by the state or by workers' cooperatives, rather than by private individuals or corporations.
2. Central planning: Economic decisions are made by a central planning authority, such as a government agency, with the goal of maximizing social welfare and reducing inequality.
3. Price controls: Prices are often controlled by the government to prevent inflation and ensure that goods and services are affordable for all.
4. Income redistribution: The government uses taxes and transfer payments to redistribute income and wealth, with the goal of reducing inequality and promoting social justice.
5. Universal access: Basic necessities such as healthcare, education, and housing are often provided to all citizens as a universal right, rather than being allocated based on ability to pay.
6. Limited competition: In a socialist economy, there is often limited competition among producers, as the government may regulate or control the production of goods and services.
7. Emphasis on social welfare: The goal of a socialist economy is to promote the well-being of society as a whole, rather than maximizing profits for individual businesses or investors.

Mixed Economy:

A mixed economy is an economic system that combines elements of both market and socialist economies. In a mixed economy, there is a mix of private ownership and government control, with both the market and the government playing a significant role in the allocation of resources and the distribution of goods and services.

Features of Mixed Economy:

1. Private ownership: Private individuals and businesses own and control some of the means of production and distribution of goods and services.
2. Government regulation: The government regulates and controls certain aspects of the economy, such as environmental protection, worker safety, and consumer protection.
3. Market forces: Prices are determined by market forces of supply and demand, and businesses operate based on the profit motive.
4. Public goods and services: The government provides public goods and services such as education, healthcare, and transportation, which are not typically provided by the private sector.
5. Income redistribution: The government may use taxes and transfer payments to redistribute income and wealth, with the goal of reducing inequality.
6. Competition: Competition among producers is encouraged to promote efficiency and innovation in the market.
7. Social welfare: The government may also provide social safety nets, such as unemployment benefits and welfare programs, to support those in need.