AS Level

Topic:BASIC
ECONOMIC
PROBLEM

Fahad Munaf Parekh

 Basic Economic Problem * Nature of Economics
b.
Unlimited Wants ( DT ) Factors of Production Eg Payments / Rewards
limited resources ( Sb) → Inputs a) Land : Natural Resources Farmland Rent

Scarcity (shortage) 2) Labour : -

Human resources Teacher Wages
Choice 3) Capital : Manmade resource Machines Interest
to 4) Enterprise : Risk Taker Owner Profits
!
Opportunity Cost
b. Economic Agents
Economic Agents Consumer

1) Consumer ) Producer 2 hoods

e) Government ✓ ↳
b. Goody Goodx
-

Increasing Opportunity Cost g- b.

Constant opportunity lost b. 9
Decreasing Opportunity Cost ¥1

Producer Government

Iaoods Zleoods

✓ → £ ↳
Capital Goods Consumer Goods Public hood Subsidy
Eg : Machines Durable : Television (streetlights) ( Declining Industry)
Longterm Investment Non Durable :
-
Food Items
-

T to
T b . d. I
b. I
aoodxat.dz#--*e- A
Specialize
y
Lya og
" oh
⇐

Increasing Opportunity Cost

"

0
× R Good #
Cat , )
 Basic Economic problem represents unlimited mints but to satisfy them an economy has

limited resources or inputs which leads to scarcity thus economic agents are required
to make a choice i. e- the real cost of choosing one thing and not another which

means the next best alternative forgone .

Opportunity Cost is the real cost of choosing one thing and not another which means the

next best alternative forgone .

Opportunity Cost in relevance with consumers : -

Consumers while making consumption decision will be required to take opportunity cost
into consideration with limited income either Goud 's or Goudx can be consumed it

depends upon
satisfaction relieved from the good and an indivivel might choose

a combination of Goody and Good ✗ .

Opportunity Cost of more cenrswmphin of Goody

will be less hood × .

Concept of Increasing Opportunity in relevance with producers : .

If an e#
oncmy is producing 2 goods and the resources are equally divided between

Good ✗ and Goody .

Workers will be specialized in
producing a
particular good . If

reallocation of resources takes place ,

it will result in increasing opportunity cost
as the workers will be specialised in Goody so will be able to produce less of

Good ✗
using resources ,
but they will have to forgone more of Good ✗ .

Concept of Increasing Opportunity Cost in relevance with government : -

The government has two options either to provide subsidy to a

declining industry
or to provide public goods .
If the government decides to provide mere of public
goods that is street lights so will forgone subsidy so it will result in
increasing
opportunity cost due to high unemployment and less tax revenue .
 Production Possibility Curve

☒ ☒ Goody ( Atx )
Kombi rations of output
☐ Good ✗ ( at)
*x

which can be produced with given resources

Good.LY/at-y) Good.LY/at-y)

Unattainable Point
A A • f
i. e. ⑤carcity

• A

b
• ,
} Potential
>
• c
Efficient allocation of
• d resources No Wastage
,

of resources and full

•
e employment ,

0 B hood ✗ 0 L B hood ✗
( Qty) ( Qty)
Actual i. e. current situation

Inefficiency ,
Underallocation of resources and
/ unemployment
increasing 'T
Wastage of resources
tactual is

/
.

Good Katy) Actual

Reason : Consumption T
-

A
Investment T
• Er
Kovarnnent F- xp P
b is

/
-

Short-run : .
Employment ( fuel
•
(

☒
☒

d
Longrun : Hyper Inflation 1- ve )
.

¥7

d.
.

Prius 'T Real Income

-
e

F
-

Actual
↳
⑤ B Good ✗
Cat, ) Resources fixed
 Actual moving towards Origin

Goody /Qty) Actual !

Reason : Consumption !
-

A
Investment to
Er
•

Cblovarnnent F- xp !
b
lklnemploynment T
-

C- ve )
[
#
•

Wastage of resources L -
ve )
ud
Recession → Income ! 1- ve )
e
Priests
-

Deflation - *
( tire )
A
b-

⑤ B Good ✗
Actual ! cat, )

Potential is
increasing Potential is decreasing
Goody /atx) broody /atx)

C A
A ¥
potential 'T
C
Potential !
Discovery of Natural Resources Depletion of Natural Resources
Immigration of workers Immigration of Workers

Technological Advancement Rise in Price of Energy

17
¥

0 B D troodx 0 D B Goody
Cath Cath
 Actual remains same while potential is
increasing

kooodxlat.sc
A
Potential 'T
F

lklnemploynment .
#
Discovery of Natural Resources Wastage of resources
T
Immigration of workers lklnoleralloutionof resources
☒ *
☒
Technological Advancement
•

17

0 B D Goody
Cath

PPK with opportunity cost

Goody ,
Straighter PPC
goody ,aµ,
Constant Opportunity Cost
A A

opportunity Cost .
Constant Opportunity Cost

Yt ✗ %
6¢ 91

⑤ His XaB Ya •
lb .

10% lot
18%
trace
.

YI @ Oh y

10%

* it B Good ✗ 0 He ✗ B koodx
( at )
☒
caty )

Koo.dY( Qty ) hood 'Naty)

A A

Outward Bending Ppl Inwards Bending PPL

#I ,b Increasing Opportunity Cost Decreasing Opportunity Cost

go
.

I % a
.
✗ • a

"
% b. 1 ,

0 kook
! B ✗ B
0 ✗ a tnoodx
( Q&A *
latxl
?⃝
?⃝
 Potential T ! Potential ↳ T
Koo .dy( at, )
Goody CATH
C
A

E
Technological Advancement Technological Advancement .

F-
Depletion of Natural Resource Depletion of Natural Resource
A C
b.

①
B F P Good × 0
D F B Good✗
Cat, ) Catx )

•
/ Production possibility curve shows the combinations of outputs that an economy can

produce with it 's given resources . All the points on the curve la -
d) represents potential
that is efficient allocation of resources where there is full employment and no wastage
of the optimum situation for
' '
resources it is an economy The .
point e inside the

production possibility curve represents actual that is the current situation which represents
inefficiency that is under allocation of resources which results in wastage of resources

"
and unemployment f production possibility
⇐
.
The point outside the curve is unattainable

point which an economy cannot produce with it 's given resources which results
in shortage of resources that is scarcity .

•
/ This elaigram shows an increase in actual which can be due to increase in Consumption ,

Investment and Government Expenditure which will increase the current situation of
the economy tht is there will be efficient allocation of resources which results in

less wastage of resources and low unemployment This .

increase in actual will be

beneficial to the economy in the short-run in terms of multiplier effect that is income ,

output and employment will keep on increasing but will result in Hyperinflation in

the long run where prices are only increasing with no change in real income as resources

gets fixed when actual reaches potential .

/ This elaigram
•
shows an decrease in actual which can be due to increase in Consumption ,

Investment and Government Expenditure which will worsen the current situation of
the economy tht is there will be inefficient allocation of resources which results in

wastage of resources and there is unemployment . This clear ease in actual will be

beneficial to the economy in the short-run in terms of deflation as prices will be falling .

but in the longrun will result in downward multiplier effect that is income, output and
employment keeps on decreasing and the economy will move into recession that is

downturn in economic cycle .

/ This daigoam
" '
•
⇐ shows an increase in potential of the economy from AB to CD

which will increase the productive potential of the economy clue to discovery of
'
natural resources
, immigration of workers that is import of workers and technological
advancement resulting in economic growth .

/ this daigoam
" '
•

⇐ shows an decrease in potential of the economy from AB to CD

which will reduce the productive potential of the economy clue to depletion of

natural
'
resources
,
em migration of workers that is import of workers and rise in price
of energy resulting in negative economic growth .

•
/ This edaigram shows that actual stays same while potential is increasing which represents
' '
that the
gap
between actual and potential will start increasing from AB to CD

leading to under allocation of resources ,

inefficiency wastage ,
of resources and result ins in -

an increase in unemployment .
 / opportunity lost is the real cost of choosing one thing and not another that is

the next best alternative forgone .

This daigram shows the concept of opportunity cost

"
in relevance to theproduction possibility curve as the country is operating at curve
"
AB and the country has two options either to consume Good ✗ or Goody .
If the

country alecidec to produce Good Y from ¥0 to Y±' so will have to forgone cloud ×
*
from ✗ 1 to B as per the concept of micro economies .

•
/ This daigoam shows the concept of concept of opportunity cost in relevance with the

production possibility curve as the consumer have two options either to consume

" '
hood ✗ or Goody If the
.
consumer decides to consume less ⇐f- Good ✗ from Y to Ya

Io will result in mere quantity of Good ✗ from '

✗ to ✗a
'
resulting in reduction

⑨ f- same units by to -1 .
.

•
/ This Eda gram shows
-

, technological advancement and depletion of natural resource both have

"
occurred at the same time . The initial Kurve is AB due to technological advancement
has shifted to and depletion of natural occurring at the
" '
curve CD resources same

talk to ' '

time will lead to a F- f- but still there is an overall invoice in the economy "
s

resources that is technological advancement is greater than depletion of natural resources .

/This Eda gram shows

,
-

technological advancement and depletion of natural resource both have

"
occurred at the same time . The initial Kurve is AB due to depletion of natural resource

has shifted to technological advancements occurring at the

'
and
"
curve CD same

talk to ' '

time will lead to a F- f- but still there is an overall invoice in the economy "
s

resources that is technological advancement is greater than depletion of natural resources .