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 Yevi
cenm it Inkrut Pno det un Ppht (1)

Suhiachon
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Nab or
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Page tt 'S, TRain
Como d Hy-1°' V Ohji)
 Distinction between Market Economies and
Planned Economies
Following observations highlight the distinction between market
economies and planned economies:
Market Economy Planned Economy
1. It is a free economy where central 1. It is an economy under control of the
problems are solved by the forces of government. Supply and demand
supply and demand in the market. forces are regulated or controlled by
the government.

2. There is no limit to private ownership 2.

of property.
3. Maximisation of profit is the principal
objective of production activity.
4. Growth of the economy is left to the
market forces.
Private ownership of propertyis
under scanner of the government.
Ceiling on the ownership of property
may be imposed to reduce the gulf
between the rich and the poor.
(Note: In a fully planned economy,
also called command economy, (of
which there is no example at present)
private ownership of property is not
allowed at all).
3. Maximisation of social welfare is the
principal objective of production activity.
4. Growth of the economy proceeds
according to the planned programmes
(as Five Year Plans in India).

5. There is no direct participation of the 5. The government plays an active role

govemment in the process of production. inthe process of production.
19
oppornity (ont-
in it next bexf
9aau valu of a aths
(01 Aecond but) alkna ke u

Cuut
*Magginad eppon tun ity
S¬-L ul
Out put in
Te
91a k at whith
2
OYv011 a doih enal unit o output in Due-

marginal PP09 anity (ut

AG implie

OutPu+)

A L Oo (LOM
MOC
AGoo
Hofs(Higher Order Thinking Skills)
Q. What is the
opportunity cost of opting for higher studies rather than ajob?
Ans. ltistheamountofwage/salary the person would have earned in ajob.
Tt needs to be noted that a factor may have more than two uses. In
any such situation, opportunity cost is to be taken as the value of the
factor in its next best (or second best) use
only. Take the following
illustration to appreciate this point further:

Illustration:
Available Resources One hectare of land and
inputs
a given package of other
Possible of land
with the
uses
along Use-1: Production of wheat
package of other Use-2: Production of rice
inputs
Use-3: Production of maize
Use-4: Production of
Market Value of Production sugarcane
Use-1: Rs 5,000
Use-2: Rs 4,000
Use-3: Rs 3,500
Use-4: Rs 6,000
Assumption
Technique of
fully utilised. production is constant and resources
dr
Obviously, resources will be
output IS employed in Use-4
maxinum, viz. Rs 6,000. where the value or
Opportunity cost of
output in next employing resources in
best alternative
Rs 5,00 in Use-1. use of the Use-4 loss
=
loss of
O
given resources which 13is
rces which

20
10 5000

4000
Opportunity cost of allocating the given
3000 resources to Use-1 is the loss of output
in Use-2. Loss of output in Use-2 is
2000 worth Rs 5,000 which is the opportunity
N
Cost.

1000

B X
1000 2000 3000 4000 5000 6000
USE-1 VALUE OF OUTPUT = Rs 6,000

Fig. 10 shows production possibility curve AB. X-axis shows Use-I

and Y-axis shows Use-2 of a given set of resources. The diagram is
drawn on the assumptions that technology remains constant and
that the resources are fully utilised. Value of output in Use-I is
assumed as Rs 6,000, and in Use-2 as Rs 5,000. If resources are
employed in Use-1 (as it should be) the opportunity cost = Rs 5,000

(the value of the factor(s) in its next best alternative use).

Marginal 0pportunity Cost

Total resources remaining constant, when (using the given
technology) allocation in Use-2 is increased, there is a loss of output
in Use-1 (AQ,) and gain ofoutput in Use-2 (4Q). The rateat which
output in Use-I is lost for every additional unit of output in Use-2
implies marginal opportunity cost.
AQ,)
Estimating Marginal Opportunity Cost An Illustration
Productionof XProduction of Y Marginal Opportunity Cost
10,000
9,000 To produce 1 unit of X, 1,000 units of Y are to be given up.
Marginal Opportunity Cost 10,000 9,000 =1,000
2 7,500 To produce another unit of X, 1 500 units of Y are to be given up
Marginal Opportunity Cost = 9,000- 7,500 = 1,500

3 5,500 To produce still another unit of X, 2000 units of Y are to be given up.
Marginal Opportunity Cost 7,500-5,500 2,000
Thus, marginal opportunity cost is calculated in terms ofthe loss ofoutput of Yfor every addittonal
unil of X produced when resources are shifted from Yto X.
AY
Or, Marginal (pportunity Cost =A
AX

21
 Example
Al economy produces two
able summarises its goods: wheat and cloth. The
production following
possibilities.
opporuuty costs ot wheal at various Calculate the margilla
dicate? Draw the Production combinations. What does
What does lit
of the curve? Possibility Curve, What is the
shap

22
 Economics, Economy and
Central Problems of an Economy

Wheat Cloth
(kg (metres)
100 0

90 25

70 50

40 75

10 85
87

Solution:
A loss of output
Marginal Opportunity Cost:
A gain of output

Cloth Marginal
Wheat Opportunity Cost
(kg) (metres)

100

90 25 100.44
2 50 . 4

70 50 =0.8
25

40 75 = 1.2

30
85 3
10 10

87

12 100A

90-
80 to rise
Marginal opportunity cost tends
from wheat to0
as resources are shifted
cloth
60 cloth. Initially when 25 metres of
of wheat is to be
are produced 10 kg
50 of
sacrificed. For the next 25 metres
40 sacrificed
cloth, 20 kg of wheat is to be
30- and so on.
20

10
X
o 16 2030 40 50 60 70 B0 37
CLOTH (metres)