Basic concepts of economics and allocation of resources
1.1 Scarcity and choice
Scarcity refers to the condition of insufficiency of economic resources in comparison to need where the human beings fail to fulfill their wants in sufficient manner. In other words, it is a situation of fewer resources in comparison to unlimited wants .Human wants are unlimited and increase gradually. It is impossible to produce and manage goods and services to satisfy all wants of the people. Thus scarcity explains this relationship between limited resources and unlimited wants and the problem which the people have to deal.
Economics includes the study of various laws and principles which governs the functioning of an economy and its various components. Basically the economy come into existence due to two causes i.e. (i) human wants are unlimited and it goes increasing with change in the age, family, education, social and economic environment, etc. and (ii) resources which are necessary to manage goods and services are limited compared to requirement. Because of ever continuing gap between wants and resources, people cannot satisfy their need as they desire or keep in mind. This is equally applicable to individual, family, society and a whole nation. In this situation, it is necessary to decide how to use the resources to obtain maximum possible benefits to the concerned people, family, society and nation.
Scarcity is a relative concept, i.e. Resources are scarce relative to unlimited wants. The problem of scarcity exists in all dimensions in terms of individual, society as well as whole country. For example as far as individual, is concerned he is in quest of improving standard of living- have better and more luxurious shelter, latest fashion clothing, luxurious transport, better health care, etc. Governments are always having difficulties in choosing investment option requirement due to lack of resources. As a result of scarcity each and every person as well as the government needs to make a choice so that the limited available resources are used efficiently.
In spite of unlimited wants, resources with people can be used alternatively. Since it is very difficult to satisfy all wants with limited resources, people decide to select most important/urgent wants which can be satisfied with the help of available resources. As the materials such as land, raw materials, skilled manpower, capital equipment, etc are limited, it is needed to be used in most economical ways to obtain higher benefits. Thus the limited resources available at disposal and unlimited wants give rise to the problem of choice. The decision to use more resources to produce one compels to withdraw from the other side. The scarcity of resources compels to choose among the different channels of production to which resources are to be allocated.
1.2 concept of opportunity cost
Opportunity cost is the potential benefit of an individual, investor, or business men when missing some things for choosing one alternative over another. In other words, opportunity cost is the best alternative which is give up by a producer while producing a commodity.
Opportunity cost =FO-CO
FO=return on best foregone option
CO=return on chosen option
The formula for calculating an opportunity cost is simply the difference between the expected returns of each option. The concept of opportunity cost can be summarized as below.
1) Opportunity cost is the forgone/ sacrificed benefit from the other best alternatives.
2)To evaluate opportunity cost, the costs and benefits of every option available must be considered and weighed against the others.
3) The opportunity cost can guide individuals and organizations to make more profitable decision.
4) Opportunity cost includes implicit cost and explicit cost.
5) It is more useful for the purpose of business decision making.
6) If the resource has no alternative use, the opportunity cost becomes zero;
1.3 concept of production possibility curve (PPC): concept, size and shift
A) concept of PPC
Production can be defined as the creation of more utility or making more useful goods. In course of production, producers can employ various factors and methods of production arranging factors of production in different ways. The productive resources can be employed for the production of various alternative goods and services. But the productive resources are always limited. In this situation, producers should make the plan of production considering the availability of resources, various possible combinations of production, chances of profit earning, etc.
A production possibility refers to the various combinations of production. This means producers can make list of various combinations of production in the given situation. While making the combination, producers consider the possible profit. A production possibility curve shows the various possible combinations of the products which a producer can produce in the given resources and technology. Production possibility curve (PPC) is a graphical presentation of various combinations of the production which shows possible maximum output with full utilization of existing resources. It is also known as the production possibility frontier(PPF) or production transformation curve (PTC).
PPC includes concepts of scarcity, choice, allocation of resources and opportunity cost. Because of scarcity of resources, producers’ have to allocate the resources making best combination for profit. Producers consider the opportunity cost of production to make the choice of producing goods and services. As the objective of producers is to achieve higher level of production and profit, rational producers always select the best combination of production. The concept of PPC is based on the following assumptions:
1. Production of two goods only
2. Producers are rational and give focus to earning maximum profit.
3. Factors of production are given/constant (quantity, quality).
4. Given/constant technology.
5. The factors are fully utilized.
6. The factors of production are limited and homogeneous (i.e.) can be used for producing any goods or using in any options.
7. Short run analysis or concerned with short period production decision.
8. Fully and efficient utilization of resources in the economy.
9. Resources can be transferred easily from one sector to another.
As resources are limited, rational producer has to allocate all resources in the efficient ways. While distributing the resources, producers consider the best profitable situation as given the condition. This can be illustrated with the help of following table and diagram.
In the table and diagram if producers use all given resources for production of Y, 15 quintals of Y can be produced. In this situation, the production of X is zero. In the same manner, if all resources are used to produce X, 5 quintal X can be produced. In this situation, the production of y is zero. These two possibilities A and F are possible if producers decide to produce only one goods. But there are many other production possibilities, Such as ‘B’, ‘C’,’D’ and ‘E’ which show the combination of different quality of goods X and Y. If the producer goes to combination ‘B’, that can produced 14 quintals of Y and 1 quintal of X. If the producer makes combination ‘C’ that can produce quintals of Y and 2 quintals of X. By joining the combination ABCDE and we get PPC.
B. Shift in PPC
The PPC can shift either right or left when there is change in resources or technology with respect to both products in the long run. The causes of rightward shift may be increased in the supply of productive resources, invention and innovation of new ideas and improvement in technology, expansion of market of product, etc. In the same manner the causes of shift of PPC to the left are decrease in the supply of productive resources, technological degradation, contraction of the market size, etc.
In the figure, initial PPC is PP. This PPC (PP) exists in the short-run. In the long run, PP shifts rightward and become P1P1 due to change in various factors such as increase in resources, improvement in technology, etc. Again, PPC may shift leftward due to change in various factors such as decrease in supply of productive resources, technological degradation, and contraction of the market size. As a consequence; PPC may shift from PP to P2P2. . Some basic characteristics of PPC discussed below as:
1. PPC slopes drawn wards: PPC shows inverse relationship between changes in quantity of one commodity with respect to change in others. Because of limited resources, producer has to reduce quantity of one good in other to produce additional unit of another goods. As a result, PPC slopes downward marking combinations.
2. PPC is concave to the origin: PPC is concave to the origin due to changing the marginal opportunity cost (MOC) or marginal rate of transformation (MRT). This means producers have to sacrifice more and more units of one goods successively while producing additional one unit of other production.
3. Higher PPC shows higher combination of output: Rightward PPC shows combinations of both goods. Higher PPC shows higher level of output and lower PPC shows the lower level of output.
4. PPC do not intersect each other: Higher or lower PPC show different combination while utilizing the resources. So they do not intersect each other by any ways.
5. PPCs may not be parallel to each other: The rate of scarifies may change according to situation. So there would be different proportion of two goods .Beacuse of that PPC need not to be parallel to each other.
1.4 Allocation of
Resources:
Allocation of resources is common economic problem faced by people and the economy. It is concerned with distribution of limited resources to produce the different goods and services for more profit. The objective of allocation of resources is to use scarce resource optimally and ensure maximum benefits to the people. Prof. Stigler has defined allocation of resources as the main theme of economics. He has said that economics is the study of principles governing the allocation of scarce resources among competitive ends.
The objective of producers is to earn maximum profit. But they have always limited resources. In this situation, they have to manage the resources so that maximum profit would be possible. Allocation of resources is mainly concerned with the basic economic problem related to earn higher profit. So producers have to find the answer of various basic questions such as ‘what to produced’; ‘how to produce;’ ‘for whom to be produced;’ etc. These basic questions in terms of allocation resources are described as below:
1. What to produce?
Every producer has to decide about the good they want to produce. There is always trade-off among the various product alternatives due to limited resources with them. In this situation they have to decide which one product or which one combination of products provides best return among the various opportunities. The problem of what produce is primarily determined by the ability of the producer and need of the people.
2. How to produce?
Method of production is another important question for producer’s decision. So they have to take the decision regarding the method of production. Selecting the method of production depends on the availability of resources and allocation efficiency. If the producers use more and more Labour with limited amount of capital, the production system is called Labour intensive technology. Producers’ can apply this method if the availability of Labour is more and cheap than capital. In the same manner, if the producers use more and more units of capital with limited amount of Labour in the production process, then the l production system is known as capital intensive technology. It would be better to compare the cost of production from both methods. Producers’ have to choose the method that provided maximum profit and allocate the resources as per requirement.
3. How much to be produced?
Producers’ have to consider the size of market so that quantity of production can be decided. While allocating of resources, producers should consider the quantity demand in the market. Producers can allocate more resources if the change of selling the product is more. It would be better to take the decision to produce the goods and services which can be sold more than other alternatives. The answer of this question depends upon the availability of resources, efficiency of producers, prospects of products in the market, etc.
4. for whom to be produced?
Producers have to consider the nature of product and consumers. As goods are demanded by the consumers, producers should consider the nature of consumers, purchasing power, taste and preference of consumers, availability of alternative goods and services, etc.
Division of Labour is dividing the work among the various workers. It means process of production split up into many parts and each part is performed by different workers. Specialized workers are assigned the certain function of production. As production is so technical and complex, it is better to put the workers into different work according to their desire, capacity and ability. One becomes specialized in the production of those goods for which he or she is best suited. This results the better performance in quantity and quality of production.
1.5.1 Concept of
Division of Labour and Specialization
Some economists have defined the division of Labour. According to Watson, production by division of Labour consists in splitting up the productive process into its component parts, concentrating specialized factor on each sub-division and combining their output into particular forms of consumption output required. In the same manner, Hanson has said that division of Labour means specialization of process. Chapman has said that the specialization of works is called division of labour. There are four forms of division of Labour-occupational or simple division of Labour, complex division of labour, division of labour into sub-processes or incomplete division of labour and territorial or geographical division of labour.
1. Occupational or simple division of labour:
This means division of people in society according to occupations or trade. According to this, individual participate in a particular type of occupation for which he is best suited. When the whole work of a particular production is carried on by the same worker, it is called simple division of Labour. This generally exists in traditional economic activities.
2. Complex division of labour:
When the entire work in production is divided into different process and each process is assigned to different persons it is called complex division of Labour. Modern large scale production is based on such complex division of Labour. For example- shoe-making involves complex division of Labour. Where the upper portion of the shoe are prepared by one group of workers, while bottom portion are prepared by another group , stitching by a third group and polishing, finishing, etc. by a other workers.
3. Incomplete division of labour:
When the complete processes of work are divided into various sub-processes and assign to complete the work to various workers, it is called incomplete division of Labour. Here each process is incomplete without the help and co-operation of each other, production is impossible.
4. Territorial or geographical division of labour:
When a particular place or region is specialized in a particular industry or in the production of a particular commodity, and workers work there, then it is called territorial or geographical division of Labour. For example, trekking and mountaineering porters are mostly from Sherpa community. Similarly, workers of team estate in Illam district are more efficient than the workers of other districts.
1.5.2 Advantage of
Division of labour:
Division of Labour benefits to different sectors such as producers, consumers, Labour efficiency, market extension, etc. The advantage of division of Labour can be discussed as below:
With the division of labour, the total production increases. Labour can perform their function rapidly. According to concept of Adam Smith, a worker can produce only twenty pins in one day. If the function of making pins is divided in various processes, then eighteen workers can produce more than 1000 pins in a single day.
2. Reduction in the cost of production:
Division of labour increases production because the workers get specialization in their assigned work. Increase in productivity of Labour reduces average cost of production. Saving of capital, tools and machinery, managerial cost etc. also help in the reduction of cost of production.
3. Maximum utilization of machinery:
The division of Labour results the large scale of production which implies more use of machines.
4. Large scale of production:
Due to use of plants and machinery under division of Labour production increases resulting less cost of production decrease in cost of production increases profit to producer.
5. Saving of time:
As there is division of Labour, there is no need for the worker to shift from one work to another. He/she is employed in a definite function with certain tools. Labour therefore goes on working without loss of time, sitting at one place. As a result there is continuity in work and saves time and helps in more production at less cost.
6. Encouragement to invention:
As work is divided into small parts and assigned to particular labour, this help much in specialization, remove the problems invention of new methods of production.
7. Production quality increases:
When the worker is provided with the work for which he is best suited he will produce superior quality goods.
8. Right man at right place:
Division of labour helps the producers to select best worker for particular work. This helps to reduce the cost of production making more profitable.
9. Increase in profit:
Division of Labour helps to reduce the cost of production and increase in quantity of output. This helps to gain more profit to the producer.
10. Availability of commodities at a chapter price:
Division of Labour helps in mass production, which makes the production process more economical. Therefore, cheaper goods are produced by producer. Availability of cheaper goods for consumers leads to increase the demand and improves the standard of living of the consumers and the people.
With the division of Labour a worker has to do the same work time and again. Workers get specialization in production of certain work. The continuation of this process leads to increase in efficiency of Labour.
Division of Labour has also certain demerits or disadvantages in many sectors like, producers, consumers, labour as well as to the nation which are as below:
1. Danger of over-production:
Over production is the situation where the supply of goods and services is comparatively more than its demand in the market. In some situation, division of labour helps for large scale production. Because of production, producers stop the production process so that unemployment increases in the economy.
2. Loss of responsibility:
Many workers have joint contribution to produce the commodity. If the production is not good and adequate no one take responsibility for it. Therefore, the division of the labour has the disadvantage of loss of responsibility.
3. Increased dependence:
When a work is divided in to a number of processes and each part is performed by different workers, it may lead to over-dependence to each other. If one worker is absent, all production process will be stopped. Therefore, increased dependence on each others can harm in some situation.
4. Evils of factory system:
The modern industrial or factory system has been developed as a result of the division of the labour. This system may create the evils like dense population, pollution, class conflict, gambling, drinking, low standard of living, poor food, etc.
5. Increased dependence on machine:
As the division of labour increases, there will be an increased use of machines. All workers use different type of machines for particular work. Division of labour increases the dependence on machines and if any problem arises in one machine, that affect in total production.
6. Monotony:
As a worker has to do the same work again and again he starts losing interest and pleasure in the work. The work becomes monotonous in nature and boredom arises and creativity decreases.
7. Lack of job pride:
As a worker performs only a part of the job, he cannot take pride in the final output. There is little pleasure of creating something. Specialized workers may lose jobs due to changes in the process of work. Traditional craftsmanship declines.
1.6 Economic Systems: Types and Features:
Various countries have followed the different economic system in the world. On the basic of the practice, policy, resources allocation system, it can be classified as capitalism, socialism and mixed economy.
1.6.1 Capitalism
A. Meaning of capitalism:
Capitalism is an economy system under which private individuals own and control business, property and capital. The volume of goods and services produced is based on a system of intersection between demand and supply. In capitalism, means of production are owned by private individuals. Means of production here refers the resources including money and other forms of capital. Under a capitalist economy, the the economy runs through individuals who own and operate private companies. Decisions over use of resources are made by the individuals who own the company.
In the capitalism, individual are free for participating in the economy. They decide where to invest their money, as well as what to produce and sell as what prices. Generally capitalism operates without direct governments controls. IN reality, however, most capitalist countries employ some degree of government regulation of business and private investment.
Theoretically, financial inequality encourages competition and innovation, which drive economic growth. Under capitalism, the government doesn’t employee the general workforce and individuals contribute to the economy based on the needs of the market and are rewarded by the economy based on their personal wealth.
Under capitalism, businessmen and companies operate business activities by the profit motives. All companies have owner and managers. In small business, the owners and managers are generally the same people, but as the business gets larger, the owner may hire managers who may or may not have any ownership stake in the firm. In this case, the managers are called the owner’s agents.
Capitalists argue that private ownership of property (Land, business, goods, and wealth) is essential for ensuring the natural right of people to control their own affairs. Capitalists believe that private sectors’ enterprise uses resources more efficiently than government. Private ownership of property makes it possible for people to borrow and invest money. Consumer prices are determined by the demand and supply forces. But socialists argue that this can enable business to become monopolies and exploit using their power by charging excessively higher prices than production costs.
The profit incentive of capitalism private ownership encourages businesses to be more efficient and innovative, enabling them to manufacture better products at lower costs. It is argued that the profit incentive encourages firms to be more efficient. Cut costs and innovate new product that people want. If firms fail to keep up, they will go out of business. Capitalism is less concerned with equity. It is argued that inequality id essential to encourage innovation and economic development.
1. Provision of private property and individual can acquire any amount of property, she/he can use these properties as he wishes, and she / he also has the right of inheritance.
2. Under capitalism, every individual has the right to make their own economic decisions without any interference.
3. Profit motive and incentive for more private investment.
4. Price mechanism is like an invisible hand that controls the workings of a capitalist economy.
5. There is no government interference in the daily activities of the business i.e. economic freedom.
6. Freedom of private ownership.
C. Advantages and Disadvantages of Capitalism:
The capitalism is free and incentive focused economy. Generally following are the main advantage of capitalism:
1. Higher rate of capital formation due to private saving and investment.
2. Freedom of choice for consumption, investment, etc.
3. Optimum utilization of resources for beneficial purpose.
4. Efficient and qualitative production of goods and services.
5. Capitalism provides consumers with choices.
6. Economic efficiency.
7. The capital approach provides a natural bridge to equality.
8. Capitalism allows the market place to set prices instead of the government.
9. Capitalism attempts to limit government spending.
10. Private property ownership.
B. The disadvantages of capitalism:
The main demerits or disadvantages of capitalism of capitalist economy are as follows:
1. Inequality of distribution of wealth and income due to efficiency differences.
2. Class struggle as inevitable in capitalist economy due to exploitation and interest conflict.
3. Social costs are very high due to excessive focus on the competition and less attention to allocate the resources for social benefits.
4. Unnecessary multiplicity and competition.
5. Instability in economy.
6. Unemployment and under-employment is common.
7. Unstable and unbalanced growth due to unplanned distribution of resources.
8. Growth of monopolies and exploitation in the society.
9. Neglect to social benefits due to preference on the personal benefits.
Socialist Economy:
A. Meaning of socialist Economy:
A socialist economy is the opposite of a free market economy. In a socialist economy. There is one centralized power, which in most cases is the government. So the government makes all decisions regarding the allocation of resources and production in the economy. The price of product is determined by centralized power and not by market forces.
The socialist economy is a planned economy and there would not be any competition. The government deserves monopoly power in almost all the business and other sectors or the economy. All business follows the regulations and instruction of the government and is not influenced by the market force of economy.
Socialist economy is describes as a system under which the means of production are owned equally by everyone in society. In some socialist, economics, the democratically elected government owns and controls major business and industries. In other socialist economic production in controlled by worker cooperatives. The slogan of socialism is, “from each according to his ability, to each according to his contribution.” Under a socialist system, everyone works for wealth that is in turn distributed to everyone. A socialist economic system operates on the premise that what is good for one is good for all, and vice versa. The government decides how wealth is distributed among public institutions.
According to Dickinson “Socialism is an economic organization of society in which they material means of production are owned by the whole community and operated by representatives of the people, who are responsible to the community being entitled to the benefits from results of such socialized, planned production, on the basic of equal rights”.
B. Feature of socialist Economy:
In this same line various scholars have explained about the nature of socialist economy. On the basis of analysis of various views, the features of socialist economy can be generalized as below:
1. Collective ownership of resources.
2. It is a fully planned economy with specific long term- plans.
3. Central planning authority has significant role in operation of the economy.
4. It has definite aims and objectives.
5. Central control and ownership of resources and decides about the distribution process as well.
6. There is less importance of price mechanism for allocating the resources and decision about the production.
7. People’s co-operation is essential in such economy.
8. There is equal opportunity for all. There is an equal distribution of income to bridge the gap between rich and poor.
9. Collective ownership exists and the resources are aimed to utilize for attaining social economic goal rather than the excess profits.
10. People have the right to work, but they cannot go for the occupation of their choice as the occupation is determined only by the authority.
11. As there is planned production, consumer sovereignty becomes limited.
12. The market forces do not determine the price of the commodities due to lack of competition and absence of profit motive.
C. Advantages of socialist Economy:
The number of scholars has described the merits or advantages of socialist economy over the capitalist economy. The major advantages are summarized as below:
1. Socialism creates a society that focuses on economy equality.
2. There is a reduction is poverty and inequality due to equal opportunities to all for work and livelihood.
3. The presence of universal healthcare can improve living standards of the people.
4. It allows the production and distribution of goods or services for the benefit of everyone instead of staying oriented on potential profits.
5. It can improve labour productivity rates when implemented correctly.
6. The goal of socialist economy is to promote the common good to increase the economic and social welfare.
7. More quality often leads to improvements in social cohesion.
8. Environmental protections can be implemented more seriously due the feeling of common responsibility.
9. It reduces the risk of price-fixing that can occur in capitalistic.
10. Balance economy development is possible due to the strict planning system of the economy.
11. It has economic stability due t the undue competition of producers and consumers.
12. There is less exploitation and class struggle.
13. Social welfare activities can run in the economy.
D. Disadvantages of socialist Economy:
Various capitalist favored economic has raised the number question regarding the socialist economy. They have pointed out various disadvantages as summarized below:
1. Socialism creates a significantly higher tax burden for individuals in the name of welfare.
2. Entrepreneurs have less motivation to operate since they aren’t true owners for earning profits for personal benefits.
3. Government can fail when trying to regulate industries or own businesses due to delay in decision making and neglecting the need of the people.
4. Socialist regulation can cause problems with structural employment.
5. Socialist economic policy reduces innovation opportunities for the society.
7. Loss of economic freedom and consumer’s sovereignty is minimized.
1.6.3 Mixed Economy
A. Meaning of mixed economy:
In the real world today a perfect free market economy and a centrally planned economic system are no found. Almost all economics have applied mixed economic system in which government plays an important role in allocation of resources and distribution of income without hurting the private sectors economic activities. The mixed economy or mixed economy or mixed economy or mixed economic system refers to an economic system in which both free market and Government have significant roles in the working of the economy. The mixed economy contains the elements of both free market system and control or regulation by the government is present. So mixed economy is a system that combines good aspects of both capitalism and socialism. Protects private property, allows a level of economic freedom are aspect of capitalism. Side by side there is provision of governments hold up in economic activities in order to achieve social objectives.
According to Hanson the mixed Economy is a golden mean by socialism and capitalism. Joseph E. Stieglitz has defined the concept in a simpler manner. He says that mixed economy is a mixture of public and private decision-making. From the scholars view and above discussions it is clear that a mixed economy implies the operation of both private sector and public sector. The enterprises in the private sector are not absolutely permitted to work freely through price mechanism and are often controlled by the state in order to inspire them to work within the frame work of the national economic planning. But they are free to run the private economic activities.
B. Features of Mixed Economy:
As the mixed economy has included the elements of capitalism and socialism, some important features of mixed economy can be summarized as below:
1. The public sector is under the control and direction of the state and decisions regarding what, how and for whom to produce are taken by the state. They are operated for public welfare and not for profit motive.
2. There is a private sector in which production and distribution of goods and services are carried out by private enterprises.
3. This sector operates under state regulations in the interest of public welfare, In certain fields of production, both public and private sectors operates in a competitive spirit.
4. A mixed economy also has a joint sector which runs jointly by the state and private enterprises. It is organized on the basic of a joint stock company where the majority shares are hold by the state. Generally large scale investment activities are run in this model.
5. Under a mixed economy, a sector is formed on cooperative principles the state provides financial assistance to the people for organizing cooperative societies.
6. A mixed economy processes the freedom to hold private property to earn profit, to consume, produce and distribute, and to have any occupation as per will of the people.
7. There is a central planning authority in a mixed economy. A mixed economy operates on the basic of some economic plans. All sectors of the economy function according to the objectives, priorities and targets laid down the plan.
8. In mixed economy, public sectors aim is to check the evils of the price mechanism rather than control the private sector.
9. The principal aim of a mixed economy is to maximize social welfare. This feature incorporates the merits of socialism and avoids the demerits of capitalism.
10. Various restrictions are placed to control the monopoly and concentration of economic power in the hands of the rich through various fiscal and direct control measures.
C. Advantages of mixed economy:
Because of accepting the various good aspects of capitalism and socialism a mixed economy processes certain merits or advantages as pointed out below.
1. Since a mixed economy incorporates the features of both capitalism and socialism, the resources of the economy are utilized in the best possible manner.
2. The price mechanism, profit motive, freedom of consumption production, and choosing occupation lead to the efficient allocation of resources.
3. As the possibility of mal-allocation of resources appears, the state regulation and control rectifies it and brings in to track easily.
4. A mixed economy maintains balance between the public and private sector. There is competition as well as cooperation between the two sectors which are favorable for achieving a high rate of capital accumulation and economic growth.
5. By maintain a maximum level of production in the two sectors, the state is able to achieve the targets laid down in the plan.
6. There is less chance of exploitation. The workers are not forced to work. Workers are provided monetary incentives in the form of bonus and cash rewards for inventions. Labour laws are implemented for fixing minimum wages, duration of work, working conditions, required environment, etc.
7. Supply and demand is maintained through pricing instead of regulation.
8. Because of the presence of competition in the mixed economy, there are fewer changes for organizations to form monopolies. That means a mixed economy promotes better promotes better production efficiencies.
9. The mixed economy attempts to balance the need for private innovation with the need for the massive supports a government provides.
10. Competition in the mixed economy encourages producers to seek out innovative processes. Consumers have the option to choose whatever goods or services they prefer.
D. Disadvantage of mixed Economy:
A mixed economy has also certain disadvantages as below:
1. The experience of the working of mixed economies reveals that the public sector and the private sector do not cooperate with one another.
2. The private is taxed heavily, while the public sector is given subsidies and preference over the former in the supplies of inputs.
3. The public sector of mixed economy is a burden on the economy because it works inefficiently. Bureaucratic control brings in the inefficiency in decision making as well as allocation of resources. There is over-staffing of the personal, corruption and nepotism.
4. The experience of mix economic system in the developed countries also reveals that they have not been able to remove economic fluctuations.
5. This creates situation where the efficient competitor and wealthy get more, and the poor get less.
6. Government-run industries can quickly turn into subsidized, mergers that require massive spending; the state then shifts budget resources from other segments to settle the problems of public industries creating new obligations in a never-ending cycle.
7. There is always corruption and black marketing in these system political parties and self-interested people take undue advantages from public sector. Hence, this leads to emergence of several evils like black money, bribe, tax evasion and other illegal activities.
Quick review:
Scarcity and choice:
· Scarcity refers to the condition of insufficiency of economic resources in comoarison to need where the human beings fail to fulfill their wants in sufficient manner
· In other words, it is situation of fewer resources in comparison to unlimited wants.
· Scarcity explains the relationship between limited resources and unlimited wants and problem which the people have to deal.
· Choice is the process of selecting more important wants from the bundles of goods or wants.
Concept of Opportunity Cost:
· Opportunity cost is the potential benefit of an individual, investor, or business men when missing some things for choosing one alternative over another.
· Opportunity cost is the forgone/sacrificed benefit from the other best alternatives.
· Opportunity cost includes implicit cost and explicit cost.
· If the resource has no alternative use, the opportunity cost becomes zero.
Production Possibility Curve (PPC):
Concept of PPC:
· A production possibility curve show the various possible combinations of the products which a producer can produce in the given resources and technology.
· Production possibility curve (PPC) is a graphical presentation of various combinations of production which shows possible maximum output with full-utilization of existing resources.
· PPC includes concepts of scarcity, choice, allocation of resources and opportunity cost.
Characteristic of PPC:
1. PPC slopes downwards
2. PPC is concave to the origin.
3. Higher PPC shows higher combination of output.
4. PPC not intersects each other.
5. PPCs may not be parallel to each other.
Allocation of Resources:
Allocation of resources is concerned with the distribution of limited resources to produce the different goods and services for more profit. producers have to find the answer of the basic question such as “what to produce” “How to produce””how much produce” “for whom to be produced” etc.
Division of labour:
Division of labour is dividing the work among the various workers. on the basis of their interest, skill and experience. It means process of production split up into many parts and each part is performed by different workers.
Advantages of Division of labour:
1. Increase in production.
2. Reduction in the cost of production.
3. Maximum utilization of machinery.
4. Large scale production.
5. Saving of time.
6. Encouragement to inventions.
7. Production of superior quality of goods.
8. Best selection of the workers.
9. Increase in profit.
10. Availability of combination at a cheaper price.
11. Increase in efficiency of labour.
Disadvantage of Division of labour:
1. Danger of overproduction.
2. Loss of responsibility.
3. Increased dependence.
4. Evils of factory system.
5. Increased dependence of machines.
6. Monotony.
7. Lack of job pride.
Economic
System:
Meaning of capitalism: Capitalism is an economic system under which private individuals own and control businesses, property, and capital. The volume of goods and services produced is based on a system of interaction between demand and supply. In capitalism, means of production are owned by private individuals. Under a capitalist economy, the economy runs through individuals who own and operate private companies.
Socialism:
A socialist economy is the opposite of a free market economy. In a socialist
economy, there is one centralized power, which in most cases is the government. The socialist economy is a planned economy
and there would not be any competition. The government deserves the monopoly in
almost all the business and other sectors or the economy.
Mixed economy: The mixed economy or mixed economic system refers to an economic system in which both free market and Government have significant roles in the working of the economy. The mixed economy contains the elements of both free market system and control or regulation by the government is present. So mixed economy is a system that combines goods aspects of both capitalism and socialism.
Glossary:
Allocation of resources:
Allocation of resources concerned with distribution of limited resources to produce the different goods and services for more profit.
Capitalism:
Capitalism is an economic system under which private individuals own and control businesses, property, and capital.
Choice:
Choice is the process of selecting more important wants from the bundles of goods or wants,
Division of
labour:
Division of labour is dividing the work or process of production split up into May parts is performed by different workers.
Opportunities
cost:
Opportunities cost is the potential benefit of an individual investor, or business men when missing some things for choosing on alternative over another.
Production
possibility curve:
A production possibility refers to the various alternative combinations of production.
Scarcity:
Scarcity refers to the condition of insufficiency of economic resources in comparison to need where the human beings fail to fulfill their wants in sufficient manner.
Socialism:
Socialism is the situation where, government control all economic activities i.e. allocation of resources, distribution of resources, price of products, etc.
Exercise:
Long
question:
1. Explain the concept of production possibility curve (PPC). What is the feature?
2. What is division of labour? Explain its merits and demerits?
Or, what is division of labour? Explain advantages and disadvantages?
3. Define capitalism. What are its advantages and disadvantages?
4. What is socialism? Explain its merits and demerits?
5. Compare the features of capitalism, socialism and mixed economy?
Short questions:
1 Explain about the scarcity and choice?
2. Explain the concept of opportunity cost?
3. Explain the concept allocation of resources?
4. Define and explain the types of division of labour?
5. What are the advantages of division of labour?
6. Describe the disadvantages division of labour?
7. What is the feature of capitalism?
8. Explain the various advantages of capitalism?
9. What are disadvantage of capitalism?
10. What are the characteristics of socialism?
11. Explain the various advantage of socialism?
12. What are the disadvantages of socialism?
13. Point out the feature of mixed economy?
14. Explain the merits of mixed economy?
15. What are the disadvantages of mixed economy?
Very short question:
1. Define scarcity and choice.
2. What I opportunity cost.
3. Define PPC.
4. Mention any four features of PPC.
5. What is shift in PPC?
6. Define allocation of resources.
7. Define division of labour.
8. Mention any four advantages of division of labour.
9. Write any four disadvantages of division of labour.
10. Define capitalism.
11. Mention any four features of socialism.
12. Define socialism.
13. What meant by mixed economy.
Project work
activities:
1. Make the list of different works in your society. Study and make the report how they are dividing the work among the workers.
2. Study any business activity in your local area. Analysis about the allocation of resources for various activities.
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