Central problem of

economy

CLASS 11
MICRO ECONOMICS
 NOTES
CENTRAL PROBLEM OF
ECONOMY
Basic terminology
Economics
It is a social science, it deals with the study of human behaviour in
the society in the process of production, consumption, exchange
and distribution of goods and services with the given resources.

Scarcity of resources
The limitation of resources in relation to its demand.

Allocation of resources
It refers to the distribution of resources for producing goods and
services. It is related to the central problem of the country.

Economizing of resources
Proper utilization of resources for producing goods and services
with minimum cost.

Micro and macro economics

Micro
The word has been derived from the Greek word ‘Mikros’ which
means small.
It deals with the determination of price output of an individual in
the market.
Micro economics variable are:-demand, supply, price etc.

JOIN OUR YOUTUBE COMMUNITY

ECONOMICS ON YOUR TIPS COMMERCE CHAMPIONS ACCOUNTS ADDA

CLASS1111ACCOUNTS
CLASS ACCOUNTS
 NOTES
CENTRAL PROBLEM OF
ECONOMY
Macro
The word macro has been derived from the Greek word ‘Macros’
which means large/aggregate.
It deals with the output, employment, income determination of
an economy as a whole.
Macro economics variable are;-aggregate demand, aggregate
supply ,savings etc.

Economic problem/Central Problem of the economy

It is a problem which every economy has to face in the path of its
development

Basic reasons
The reasons due to which a country faces economic problems are
as follows :-
1. Unlimited Wants(unlimited ends)
2. Limited resources(scarce resources)
3. Alternative use

1.Unlimited wants
Human wants are unlimited regardless to the nature of available
resources, if one of his want gets satisfied than another want crops
up.

2.Limited resources
In order to fulfil unlimited wants of human, the resources are
limited. That is the resources are scarce in relation to our wants, so
we should get best out of what we have.
JOINOF
FORMS OUR YOUTUBE
BUSINESS ORG. COMMUNITY
(BUISNESS)
CLICK HERE
ECONOMICS ON YOUR TIPS COMMERCE CHAMPIONS ACCOUNTS ADDA

CLASS1111ACCOUNTS
CLASS ACCOUNTS
 NOTES
CENTRAL PROBLEM OF
ECONOMY
3.Alternative use
The scarce resources are used alternatively. And hence it becomes
important to decide the allocation/distribution of resources
effectively and efficiently.

3 reasons creates different economic problem in an economy

What to produce
How to produce
whom to produce

What to produce
Due to scare resources, the economy can’t produce unlimited
goods and hence the quantity and priority of goods must be
decided.
economy has 2 types of goods. I.e. consumer goods or producer
goods.

How to produce
It is related to choice of technique of production.
The goods must be produced in such a way that it gives most
efficient output to the economy.
2 types of techniques of production
Labour Intensive Technique{LIT}
Capital Intensive Technique{CIT}

Whom to produce
It is related to the distribution of national product in the economy.
Personal distribution and Functional distribution

JOIN OUR YOUTUBE COMMUNITY

ECONOMICS ON YOUR TIPS COMMERCE CHAMPIONS ACCOUNTS ADDA

CLASS1111ACCOUNTS
CLASS ACCOUNTS
SAARE NOTES
EK SAATH
DOWNLOAD OUR MOBILE
APPLICATION NOW

www.thegauravjain.com
 NOTES
CENTRAL PROBLEM OF
ECONOMY
Market economy - total allocation of resources is made by private
capitalist or businessman

Mixed economy - both private and public sector

Central planned economy - total allocation of resources is made

by central government of the country.

POSITIVE AND NORMATIVE ECONOMY

S.NO Positive economy Normative economy

1 ‘what is’ ‘what ought to be’

2 it is related to the current it is related to the ideal situation

situation of the economy of the economy

3 Example:- Example:-
The population of the The government should
country is 125 cr. implement a new package of
Rate of poverty is program for removing the
increasing day by day. rate of poverty, more and
more minimum needs
program should be adopted.

JOIN OUR YOUTUBE COMMUNITY

FORMS OF MARKET (ECONOMICS)

ECONOMICS ON YOUR TIPS COMMERCE CHAMPIONS ACCOUNTS ADDA

CLASS1111ACCOUNTS
CLASS ACCOUNTS
 NOTES
CENTRAL PROBLEM OF
ECONOMY
Production Possibility Curve {PPC}
It is the graphical representation of alternative production
possibilities of 2 goods facing by an economy due to limited
productive resources.

It is an alternative combination of production of 2 goods with the

given resources and technology.
PPC is also known as :
Production possibility frontier
Transformation curve

Assumptions
Resources are given.
Technology must remain constant.
Alternative comparison between 2 goods

The line of PPC shows that the given resources are fully utilised
and employed. In a fully employed economy, an increase in
production of one good necessitates the decrease in the amount
of production of other good.
Meaning of various points in PPC
Here in above figure
Point ‘C’- Underutilization of resources.
Point ‘E’- non feasible region.( beyond
the capacity of economy)
Remaining points - fully utilization of
resources

JOIN OUR YOUTUBE COMMUNITY

FOLLOW US ON INSTAGRAM
@gaurav_jainofficial
ECONOMICS ON YOUR TIPS COMMERCE CHAMPIONS ACCOUNTS ADDA

CLASS1111ACCOUNTS
CLASS ACCOUNTS
 NOTES
CENTRAL PROBLEM OF
ECONOMY
Shift and rotation of Production Possibility Curve
Shift in Production Possibility Curve
PPC shift because of change in technology and resources of both
the goods.
1.Rightward shift
If the technology and resources of both the goods get more
advanced and effective then the curve will shift parallel towards
right as shown in figure
This is so because the country will now become more advanced in
producing the goods as a result the production of both the goods
will increase and the curve shift parallel towards right.
The production of good y increases from A to A’ and the
production of good x increases from B to B’.

2.Leftward Shift
If the technology and resources of both the goods has becomes
redundant or outdated then it will ultimately decreases the
production of the economy and hence the curve will shift parallel
towards left as the country is now bound to produce less amount
of both the goods.

JOIN OUR YOUTUBE COMMUNITY

FREQUENCY DIAGRAM (STATISTICS)

ECONOMICS ON YOUR TIPS COMMERCE CHAMPIONS ACCOUNTS ADDA

CLASS1111ACCOUNTS
CLASS ACCOUNTS
SAARE NOTES
EK SAATH
DOWNLOAD OUR MOBILE
APPLICATION NOW

www.thegauravjain.com
 NOTES
CENTRAL PROBLEM OF
ECONOMY
Rotation of PPC
The curve will rotate if their exist change in technology and
resources of any one good keeping the technology and resources
of other good constant……

1.Increase in technology and resources of good x

With remain same in technology and resources of good ‘y’ if the
technology of good ‘x’ increases then the Production possibility
curve will rotates towards right.

2.Decrease in technology and resources of good x

When the technology and resources of good x decreases then the
economy would be bound to produce less amount of good x due to
lack of technology.

JOIN OUR JOIN OURCHANNEL

TELEGRAM YOUTUBE COMMUNITY
( GAURAV JAIN OFFICIAL )

FREEYOUR
ECONOMICS ON NOTES/PDF
TIPS PRACTICE PAPER
COMMERCE DAILY UPDATE
CHAMPIONS ACCOUNTS ADDA

CLASS1111ACCOUNTS
CLASS ACCOUNTS
 NOTES
CENTRAL PROBLEM OF
ECONOMY
3.Increase in technology and resources of good y
When the technology of good y increases the firm would resort to
produce more amount of good y with same quantity of good x and
hence the production of good y increases

4.Decrease in technology and resources of good y

Decrease in technology of good y reduces its quantity of
production, keeping the production of good x constant.

JOIN OUR YOUTUBE

RECTIFICATION COMMUNITY
OF ERRORS (ACCOUNTS)

ECONOMICS ON YOUR TIPS COMMERCE CHAMPIONS ACCOUNTS ADDA

CLASS1111ACCOUNTS
CLASS ACCOUNTS
 NOTES
CENTRAL PROBLEM OF
ECONOMY
Opportunity cost The next best alternative that is forgone is
known as opportunity cost. The reduction in output of one
commodity releases productive resources which can be used
for the production of additional units of the other good. It is
also known as alternative cost.

As presented in the given diagram, the

production of good ‘y’ is being sacrificed (y to y’)
for more production of good ‘x’ (x to x’) which is
called opportunity cost. The resources which are
released by decreasing the production of good y
help in the production of an extra unit good x
and hence the production of good x increases.

Why does PPC slopes downward?

The unit of good ‘y’ is being sacrificed for an additional unit of
good ‘x’ .which means the unit of good ‘x’ increases and the unit of
good ‘y’ decreases. So, the PPC slopes downward from left to
right. It is also known as ‘Marginal opportunity cost {MOC}’ or
‘Marginal rate of transformation {MRT}’.

Marginal Rate of Transformation

The rate by which the producer decreases the production of one
good as to increase the production of another good.

MRT/MOC= ∆Y(-ve ) = Change in good y

∆X(+ve) Change in good x

JOIN OUR YOUTUBE COMMUNITY

FOLLOW US ON INSTAGRAM
@gaurav_jainofficial
ECONOMICS ON YOUR TIPS COMMERCE CHAMPIONS ACCOUNTS ADDA

CLASS1111ACCOUNTS
CLASS ACCOUNTS
SAARE NOTES
EK SAATH
DOWNLOAD OUR MOBILE
APPLICATION NOW

www.thegauravjain.com
 NOTES
CENTRAL PROBLEM OF
ECONOMY

Here the –ve sign with good y only represents

that the production of good y is being
decreased and the +ve sign with good x
represents that the production of good x
increases.

Why does PPC concave to origin?

The shape of PPC is decided by the rate of change in MRT/MOC.
Here, the rate of MRT is continuously increasing so that our curve
is concave to the origin.

Combination Good ‘Y’ Good ‘X’ ΔY ΔX MRT(ΔYΔX)

A 20 1 --- --- ---

B 18 2 2 1 2:1

C 15 3 3 1 3:1

D 11 4 4 1 4:1

E 6 5 5 1 5:1

JOINOFOUR
FORMS YOUTUBE
BUSINESS ORG.COMMUNITY
(BUISNESS)
CLICK HERE
ECONOMICS ON YOUR TIPS COMMERCE CHAMPIONS ACCOUNTS ADDA

CLASS1111ACCOUNTS
CLASS ACCOUNTS
 NOTES
CENTRAL PROBLEM OF
ECONOMY

As presented in the given schedule.

The unit of good ‘y’ decreases from 20,18,…6
and the unit of good ‘x’ increases from 1,2,…5 As
a result the rate of substitution between good
‘y’ and good ‘x’ goes on increasing and hence
PPC is concave to origin. That is, due to increase
in the rate of marginal opportunity cost.

When MRT is constant

In case when the rate of MRT is constant the PPC would be a
downward sloping straight line.
It is because the rate of substitution between good y and good x is
same at all the levels.

When MRT goes on diminishing

If MRT goes on diminishing then curve would be convex to origin.
(As shown in the given figure).

JOIN OUR YOUTUBE COMMUNITY

ECONOMICS ON YOUR TIPS COMMERCE CHAMPIONS ACCOUNTS ADDA

CLASS1111ACCOUNTS
CLASS ACCOUNTS
 NE SHOT
THE GAURAV JAIN

BEGINNER ADVANCED
CENTRAL PROBLEM OF ECONOMY CLASS 11
WHATSAPP CHANNEL FOR NOTES AND IMPORTANT QUESTIONS

7690041256
YE LE BAALAK ... MAUJ KAR

THE GAURAV JAIN 7690041256