CLASS 11 ECONOMICS CHAPTER 2
                                                                           CENTRAL PROBLEMS OF AN ECONOMY
                                            
                  INTRODUCTION: Every economy in the world faces the problem of unlimited wants and limited 
                  resources.
                  This economic problem gives rise to people making choices about how they would like to use scarce 
                  resources. This economic problem gives rise to the central problems of an economy which are as 
                  following
                      1.  What to produce and in what quanttese
                      2.  How to producee
                      3.  For whom to producee
                          These are called central problems because every economy has to face them and seek solutons 
                          to them. Collectvely these central problems are called the problem of Allocaton of Resources.
                                  
                  Different economies solve the central problems differently,  as under
                                  MARKET ECONOMY- Market economy is a free economy. It means that producers are 
                                   free to decide what, how and for whom to produce. On  what  basis do they take their 
                                   decisionse It is on the basis of supply and demand forces in the market.
                                   The decisions are taken as under:
                                   (a) What to produce – The producers will produce those goods which offer them  high 
                                       profits
                                   (b) How to produce- The producers will always use that technology which efciency 
                                       maximises  and cost minimises .
                                   (c) For Whom to produce- In a free economy the producers will produce goods for 
                                       those people who can afford to pay high prices. Poor sectons of the society are 
                                       often ignored. It causes the problem of Economic divide( the gulf between the rich 
                                       and poor).
                                  CENTRALLY PLANNED ECONOMY- Here the decisions related to what how and for whom
                                   to produce are taken by some central authority of the government. All decisions are 
                                   taken to maximise social welfare not to maximise profits.
                          Those  goods and services are produced which the central authority finds as most useful for the 
                          society and that technique of producton will be adopted which is socially most desirable. For 
                          instance labour intensive techniques are adopted so as to create  employment  opportunites
                                  MIXED ECONOMY- Mixed economy shares the merits of market economy as well as 
                                   centrally planned economy. In certain areas decisions are taken entrely on the basis of 
                                   social consideratons. Briefy in a mixed economy the decisions relatng to what, how 
                                   and for whom to produce are neither left entrely to market forces nor to any central 
                                   authority. Both of them play a mixed role.
       PRODUCTION POSSIBILITY CURVE :
       We know that resources are limited and have alternatve uses.  A producton  possibility curve is a curve 
       which shows various combinatons of two goods which can be produced within the given resources and 
       technology showing all possible optons of output for two products that can be produced using all 
       factors of producton.
       Lets learn it with the help of the following example and diagram:
       .
                        The above table shows the different possibilites of producton of two goods is called producton 
                        possibility schedule.
                        Representng these various producton possibilites on a graph we get producton possibility curve  as 
                        shown in the above Figure 
                        SLOPE OF PPC
                              (i)   It slopes downwards from left to right
                                          (ii)        It is concave to the point of origin.
                                                      WHY PPC SLOPES DOWNWARDSe
                                                       It is because with the given resources increase in the output of good 2 is possible 
                                                      only when there is decrease in output of Good1
                                                      WHY PPC IS CONCAVE TO THE ORIGINe
                                                      PPC is concave to the origin because of increasing Marginal Opportunity Cost. This is
                                                      because inorder to increase the producton of one good by 1 unit more and more 
                                                      units of the other good have to be sacrificed since the resources are limited and not 
                                                      equally efcient in the producton of both the goods.
                                                      OPPORTUNITY COST- IT is the loss of other alternatve when one alternatve is 
                                                      chosen.
                                                      MARGINAL OPPORTUNITY COST- IT analyses the effect of producing additonal units 
                                                      of a product on the costs of a business as well as the opportunites the companies 
                                                      give up to produce more of a product.
                                                      ASSUMPTIONS OF PPC
                                                      (i)   Resources are given
                                                      (ii) resources are fully and efciently used
                                          (iii)       Technology remains constant
                                                      SHIFT IN PPC AND ROTATION IN PPC
                                                      The PPC shifts towards left when there is a  technological degradaton or decrease in
                                                      resources while the PPC shifts towards the right with advancement of technology or 
                                                      increase in the availability of the resources. While a point below PPC depicts 
                                                      inefciency or underutlisaton of available resources.
               The above diagram is showing a rightwards shift in PPC.