Class Test – 01

Course Code: 0311-ECO-101

Course Name: Principle of Economics
Topic: Basic Economics Problems
Md. Mahbub Alom Sir
Time: 30 minutes Mark: 15

Date: 12.01.2025 – Mahbub Alom Sir – 02:00-3:30 pm.

Introduction:
Economics is the study of how people use limited resources to meet their unlimited wants and
needs.

Definition of Economics:
According to Lionel Robbins, “Economics is the Science which studies Human behaviour
as a relationship between ends and scarce means which have alternative uses”

It is social because it involves people and their behaviour. It is science because it uses as much
as possible a Scientific approach in its investigation of choice.

Explanation of Definition:
1. Ends: These are the goals or wants that people aim to achieve.
2. Scarice: Resources are limited in supply and can not satisfy all human wants.
3. Alternative Uses: Scarice resources can be used For different purpose requiring Choice
and prioritization.
4. Social Aspect: Economics is considered a social Science. It studies human behaviore.
5. Scientific Aspect : Economics applies a systematic and scientific approach to
investigate and analyze how choices are made.

Why Economical problem arises?

Ans: The main reasons economic problems arise are:

1. Limited Resources:

Natural resources, money, and time are not infinite. There’s not enough to satisfy everyone’s
needs.

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 2. Unlimited Wants:

Humans always want more, whether it’s better food, houses, or technology. As one want is
satisfied, new wants arise.

3. Alternative Uses of Resources:

Resources can be used in different ways. This leads to the problem of deciding how to allocate
them efficiently.

Example: Should water be used for drinking, farming, or generating electricity?

Scarcity:
Scarcity in economics is the condition where limited resources are available to satisfy unlimited
wants and needs.

Choice:
Choice means deciding how to use limited resources to satisfy your needs and wants.

For example: If you have only enough money to buy either a book or a toy, you must choose
one.

Opportunity Cost:
Opportunity cost is the value of the next best alternative you give up when making a choice.

Date: 13.01.2025 – Mahbub Alom Sir – 3:30-5:00 pm.

Types Of Economics:
1. Micro-economics
2. Macro-economics

1. Micro Economics:
Microeconomics is the branch of Economics that deals with human behavior and
choices as they relate to relatively small units – An individual, A firm, An industry, A
single market.

2. Macro Economics:

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 Macroeconomics is the branch of Economics that deals with human behaviour and
choices as they relate to highly aggregate –
Example: The goods and services in market and the entire-economy.

Difference between Microeconomics & Macroeconomics.

1. Microeconomics deals with individuals.
Where,

Macroeconomics deals with the economy as a whole entity consisting of collective individual
units

2. Microeconomics uses demand and supply

Where

Macroeconomics uses aggregate demand and aggregate supply to explain its concepts.

3. Microeconomics aims at the determination of the price of a goods or services and

factors of production

On the other hand,

Macroeconomics focuses on the determination of income and employment in the economy.

4. Microeconomics is also termed as price theory

Where,

Macroeconomics is known as income theory.

In short:
Microeconomics = Price theory.

Macroeconomics = Income theory

Factors of Production:
Land, Labour, Capital, Entrepreneurship
1. Land:
Natural resources used in production.

For example: Soil, water, forests etc.

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⇒ A farm uses land to grow crops.

2. Labour:

Human effort, skills, and abilities used in the Production process.

Example: A Teacher providing education.

3. Capital:

Man-made resources used in production Such as machinery, tools, buildings, equipment.

Example: A factory or a computer used in manufacturing.

4. Entrepreneurship:

The ability to combine the other factors of production effectively and take risks to start

Example: An entrepreneur launching a new company.

Fundamental Problem of Economics:

1. What to produce?
2. How to produce?
3. For whom to produce?

1. What to produce?
A country can not produce all goods and Services because it has limited resources.
That’s why they have to make choices.
Every economy has to decide what types of goods and services should be provided.

Example: If a farmer has a single piece of agricultural land, then he has to make a choice
between two goods, whether to grow rice or wheat.

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 2. How to produce?
There are two main technique of production these are:

1. Labour Intensive Technique. (Greater use of Labour)

2. Capital’s Intensive Technique. (Greater use of Machines)

Labour Intensive Technique promote employment

Where
Capital Intensive Technique promotes efficiency growth.

3. For Whom to Produce?

For whom to produce means deciding who will get the goods and services that are
made. It answers the Question: “who will use or benefit from these products?
Example: will it be for children?, Adults, Rich people, or poor people?

Date: 19.01.2025 – Mahbub Alom Sir – 02:00-3:30 pm.

Production Possibility Frontier/ Curve:

Definition: PPF shows the different combination of two goods or services that can be produced
with available resources and technology.
1. Only two goods can be produced in an Economy.
2. The factors of production are fixed.
3. Resources are fully Utilised.
4. The Production Technology is given & constant.
5. The PPF/PPC runs in a short period. (1 to 12 months)

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Table -1: Production Possibility Schedule:

Figure -1: Production Possibility Curve:

Date: 26.01.2025 – Mahbub Alom Sir – 02:00-3:30 pm.

Explanation:
In the table and figure above, we can observe that there are six possible combinations of cola
and pizza that can be produced in our economy.

If all resources are used to produce cola, 15 million cans of cola will be produced (Point A).
Conversely, if all resources are allocated to producing pizza, 5 million pizzas will be produced
(Point F).
As we move from Point A to Point F, we sacrifice some millions of cans of cola to produce
more pizzas.
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 Q-What is Scarcity?

Scarcity in economics is the condition where limited resources are available to satisfy
unlimited wants and needs.

Q- How does the PPF illustrate scarcity?

The Production Possibility Frontier (PPF) illustrates scarcity because it is impossible to

produce at points outside the frontier. These points represent wants that cannot be satisfied due
to limited resources.

We can produce at any point on or inside the PPF. These points are considered attainable. For
example, producing 4 million pizzas and 5 million cans of cola is a possible combination.

(Q- What is Production efficiency?

Production efficiency is the condition where maximum output is produced with given
resources and technology.)

Q- How does the PPF illustrate production efficiency?

The combinations of output that lie on the PPF demonstrate the concept of production
efficiency. Production efficiency is achieved when goods and services are produced at the
lowest possible cost. This outcome occurs at all points on the PPF. In Figure 1, Points A, B, C,
D, and E are all productive-efficient points.

Q- Why we can’t produced ‘Z’ & ‘H’ point?

Z = Attainable

At points inside the PPF, production is inefficient because resources are not being fully utilised.
For instance, in Figure 1, Point “Z” is a productively inefficient point as it lies below the PPF.
At this point, it is possible to produce more of one good without sacrificing the production of
another good.
H = Unattainable

At points outside the PPF, production is unattainable because the economy does not have
enough resources to produce such combinations of goods. In Figure 1, Point “H” represents an
unattainable point.

Conclusion:

The PPF represents all points where an economy is using all its resources efficiently.

(Q- What is Trade-off?

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 Trade off is a exchanging one thing for the use of another).

Q- How does the PPF show that every choice involves a trade-off?

The PPF shows that every choice involves a trade-off because producing more of one good
requires sacrificing some of the other good, demonstrating the need to allocate limited
resources.

(What is Opportunity Cost?

Opportunity cost is the value of the next best alternative you give up when making a choice.)
Q- How does the PPF illustrate opportunity cost?

The Production Possibility Frontier (PPF) illustrates opportunity cost by showing the trade-offs
between producing two goods; moving along the curve means choosing more of one good
while giving up some of the other, representing the opportunity cost of that choice.

Date: 27.01.2025 – Mahbub Alom Sir – 02:00-3:30 pm.

When does the PPF curve move outward or inward?

The PPF curve moves outward (to the right) when an economy grows. This means the economy
can produce more goods. In the image, the curve moves from PPF₀ (blue) to PPF₁ (purple).
Some reasons for this:
1. More resources – More land, workers, or machines help increase production.
2. Better technology – New technology helps produce more with the same resources.
3. Skilled workers – If workers become more skilled, they can produce more.
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 4. New discoveries – Finding new raw materials (like oil or minerals) can boost
production.

The PPF curve moves inward (to the left) when an economy declines. This means the economy
can produce less. Reasons for this:

1. Natural disasters – Earthquakes, floods, or droughts can reduce production.

2. War or political problems – War can destroy resources and slow production.
3. Loss of workers – If many people lose jobs or die (like during a pandemic), production
decreases.
4. Economic crisis – If businesses close and investments stop, production drops.

What does the image show?

The image shows economic growth. The PPF curve moves outward, meaning the economy can
now produce more pizzas and pizza ovens than before. The point B moves to B’, showing better
production.

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ECO 084 05680

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