Economics concepts and problems

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ECONOMICS
Assignment 01
01. Define Economics. Find several definitions for economics provided by well-known
economists?1
1.1 Adam Smith - He is considered to be the founding father of modern
Economics, defined Economics as the study of the nature and causes of nations’ wealth or simply
as the study of wealth. The central point in Smith’s definition is wealth creation. Implicitly,
Smith identified wealth with welfare. He assumed that, the wealthier a nation becomes the
happier are its citizens. Thus, it is important to find out, how a nation can be wealthy. Economics
is the subject that tells us how to make a nation wealthy. Adam Smith’s definition is a wealth-
centred definition of Economics.
1.2 Alfred Marshall - Alfred Marshall also stressed the importance of wealth. But
he also emphasised the role of the individual in the creation and the use of wealth. He wrote:
“Economics is a study of man in the ordinary business of life. It enquires how he gets his income
and how he uses it. Thus, it is on the one side, the study of wealth and on the other and more
important side, a part of the study of man”. Marshall, therefore, stressed the supreme importance
of man in the economic system. Marshall’s definition is considered to be material-welfare
centred definition of Economics
1.3 Prof. Lionel Robbins - In his book ‘Essays on the Nature and Significance of the
Economic Science’, published in 1932, Robbins gave a definition which has become one of the
most popular definitions of Economics. According to Robbins, “Economics is a science which
studies human behavior as a relationship between ends and scarce means which have alternative
uses”. A long line of economists after Robbins, including Scitovsky and Cassel agreed with this
definition and carried on their analysis in line with this definition. It is a scarcity-based definition
of Economics.
1.4 Professor Samuelson - Wrote recently and writes, “Economics is the study of how
people and society end up choosing, with or without the use of money, to employ scarce
productive resources that could have alternative uses to produce various commodities over time
and distributing them for consumption, now or in the future, among various persons or groups in
society. It analyses costs and benefits of improving patterns of resource allocation”. A large
number of modern economists subscribe to this broad definition of Economics.
1
sowell,Thomas. 2000. Basic Economics. 2000,p 1-4, chapter 1, Meaningand Defintionsof Economics.

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02. What are the main economic problems? Explain.2
2.1 Problem of allocation of resources
The problem of allocation of resources arises due to the scarcity of resources, and refers to the
question of which wants should be satisfied and which should be left unsatisfied. More
production of a good implies more resources required for the production of that good, and
resources are scarce. These two facts together mean that, if a society decides to increase
production of some good, it has to withdraw some resources from the production of other goods.
In other words, more production of a desired commodity can be made possible only by reducing
the quantity of resources used in the production of other goods.
The problem of allocation deals with the question of whether to produce capital goods or
consumer goods. If the community decides to produce capital goods, resources must be
withdrawn from the production of consumer goods. In the long run, however, investment in
capital goods augments the production of consumer goods. Thus, both capital and consumer
goods are important. The problem is determining the optimal production ratio between the two.
2.2 The problem of all economic efficiency
Resources are scarce and it is important to use them as efficiently as possible. Thus, it is essential
to know if the production and distribution of national product made by an economy is maximally
efficient. The production becomes efficient only if the productive resources are utilized in such a
way that any reallocation does not produce more of one good without reducing the output of any
other good. In other words, efficient distribution means that redistributing goods cannot make
anyone better off without making someone else worse off.
The inefficiencies of production and distribution exist in all types of economies. The welfare of
the people can be increased if these inefficiencies are ruled out. Some cost must be incurred to
remove these inefficiencies. If the cost of removing these inefficiencies of production and
distribution is more than the gain, then it is not worthwhile to remove them.
2 Pounds, Pennies and. December 2015. The Fundamental Economic Questions. December 2015.

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2.3 The problem of full-employment of resources
In view of the scarce resources, the question of whether all available resources are fully utilized
is an important one. A community should achieve maximum satisfaction by using the scarce
resources in the best possible manner—not wasting resources or using them inefficiently. There
are two types of employment of resources:
 Labour-intensive
 Capital-intensive
In capitalist economies, however, available resources are not fully used. In times of depression,
many people want to work but can't find employment. It supposes that the scarce resources are
not fully utilized in a capitalist economy.
2.4 The problem of economic growth
If productive capacity grows, an economy can produce progressively more goods, which raises
the standard of living. The increase in productive capacity of an economy is called economic
growth. There are various factors affecting economic growth. The problems of economic growth
have been discussed by numerous growth models, including the Harrod-Domar model, the
neoclassical growth models of Solow and Swan, and the Cambridge growth models of Kaldor
and Joan Robinson. This part of economic problem is studied in the economies of development.

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03. What are the main economic systems in the world and explain each economic system.3
3.1 Traditional Economic System
A traditional economic system is the best place to start because it is, quite literally, the most
traditional and ancient type of economy in the world. There are certain elements of a
traditional economy that those in more advanced economies, such as Mixed, would like to see
return to prominence.
Advantages: Certainly one of the most obvious advantages is that tradition and
custom is preserved while it is virtually non-existent in market/mixed economies. There is also
the fact that each member of a traditional
Disadvantages: The main disadvantage is that traditional economies do not enjoy the
things other economies take for granted: Western medicine, centralized utilities, technology,
etc. But as anyone in America can attest, these things do not guarantee happiness, peace, social
or, most ironically of all, economic stability economy has a more specific and pronounced role,
and these societies are often very close-knit and socially satisfied.
3.2 Command Economic System
In terms of economic advancement, the command economic system is the next step up from a
traditional economy. This by no means indicates that it is fairer or an exact improvement; there
are many things fundamentally wrong with a command economy.
Advantages: You can see how this kind of economy would, over time, create unrest among
the general population. But there are actually several potential advantages, as long as the
government uses intelligent regulations. First of all, a command economy is capable of
creating a healthy supply of its own resources and it generally rewards its own people with
affordable prices (but because it is ultimately regulated by the government, it is ultimately
priced by the government). Still, there is often no shortage of jobs as the government functions
similarly to a market economy in that it wants to grow and grow upon its populace.
3 Rosser. 2003. Comparative Economics in a Transforming World Economy. p 15-23.

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3.3 Market Economic System
A market economy is very similar to a free market. The government does not control vital
resources, valuable goods or any other major segment of the economy. In this way,
organizations run by the people determine how the economy runs, how supply is generated,
what demands are necessary.
3.4 Mixed Economic System
A mixed economic system (also known as a Dual Economy) is just like it sounds (a
combination of economic systems), but it primarily refers to a mixture of a market and
command economy (for obvious reasons, a traditional economy does not typically mix well).
As you can imagine, many variations exist, with some mixed economies being primarily free
markets and others being strongly controlled by the government. Learn more about an essential
part of our economy with this free post on understanding the stock market.
Advantages: In the most common types of mixed economies, the market is more or less free
of government ownership except for a few key areas. These areas are usually not the resources
that a command economy controls. Instead, as in America, they are the government programs
such as education, transportation, USPS, etc. While all of these industries also exist in the
private sector in America, this is not always the case for a mixed economy.
Disadvantages: While a mixed economy can lead to incredible results (America being
the obvious example), it can also suffer from similar downfalls found in other economies. For
example, the last hundred years in America has seen a rise in government power. Not just in
imposing laws and regulations, but in actually gaining control, becoming more difficult to
access while simultaneously becoming less flexible. This is a common tendency of mixed
economies.

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04. What is meant by production possibility curve and opportunity cost. (Graphical illustrations
are welcome).
4.1 Opportunity cost – Is what a person sacrifices when they choose one option over another
and an opportunity cost is the cost of an alternative that must be forgone in order to pursue a
certain action. Put another way, the benefits you could have received by taking an alternative
action.
4.2 Production possibility curve – It is a curve depicting all maximum output possibilities for
two or more goods given a set of inputs (resources, labor, etc.). The Production possibility
assumes that all inputs are used efficiently.
As indicated on the chart below, points A, B and C represent the points at which production of
Good A and Good B is most efficient. Point X demonstrates the point at which resources are not
being used efficiently in the production of both goods; point Y demonstrates an output that is not
attainable with the given inputs.
Choice Shoes
(000
000)
Robots
(000)
A 0 10
B 1 9
C 2 7
D 3 4
E 4 0
Points inside curve –
inefficient
Points outside curve –
unattainable
Points on the curve – efficient
and attainable with resources
Robots
Shoes
Robots
A
B
C
Y
X
Production possibility
curve
Shoes

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05. Illustrates the following conditions using production possibility curves.4
5.1 Economic growth. - if there was a change in technology while the level of land,
labor and capital remained the same, the time required to pick cotton and grapes would be
reduced. Output would increase, and the PPF would be pushed outwards. A new curve, on which
Y would appear, would represent the new efficient allocation of resources. When the PPF shifts
outwards, we know there is growth in an economy
5.2 Utilization of unemployed resources . - Unemployment is the condition that
exists when some available resources are NOT engaged in the production of goods and services.
In other words, some resources that could be used for production are not being used. This is
indicated in production possibilities analysis by producing a combination of goods that places the
economy inside the production possibilities curve.
4 Andrew(2007). 6 Jan 2010.Foundation of Economics. The production possibility frontier (curve) ,p 27-32
Robots
A
B
C
Y
X
Production possibility
curve
Robots
A
B
C
Y
X
Production possibility
curve
Shoes
Shoes

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5.3 Destroy of capital stock - a production possibility curve will shift inwards
when an economy has suffered a loss or exhaustion of some of its scarce resources. This reduces
an economy's productive potential.
5.4 Utilization of new technology for production of “X” commodity - If the level of
technology is improved then the whole production possibility curve will shift outward. This is
shown by P1P′ 1 curve. In that case, the factory can produce more of both X and Y commodities.
ConsumerGoods
Capital Goods
Robots
A
B
C
M
L
Shoes
X0 X 1 P1
11
1
P0
Y1
P’1
Y0
X
P’0
Y

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5.5 Full employment - Full employment is the condition that exists when all
available resources are engaged in the production of goods and services. In other words, all
resources that could be used for production are being used. This is indicated in production
possibilities analysis by producing a combination of goods that places the economy on the
production possibilities curve.
Y
X
B
A
C
D
E
L
M

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REFERENCES
Bibliography
Andrew(2007). 6 Jan 2010. Foundation of Economics. s.l. :OxfordUniversitypress,6Jan 2010.
Pounds,Penniesand. December2015. The FundamentalEconomicQuestions. December2015.
Rosser. 2003. ComparativeEconomicsin a Transforming World Economy. s.l. :MIT Press,2003. ISBN
978-0262182348.
sowell,Thomas. 2000. Basic Economics. 2000.