IntroductionClass 12 Introductory Microeconomics Case Study Questions

People in society need many goods and services in their everyday life. In fact, the list of goods and services that any individual needs is so large that no individual in society has all the things she needs. Every individual has some amount of only a few of the goods and services that she would like to use. For example, a family farm may own a plot of land, some grains, and farming implements. Each of these decision-making units can produce some goods or services by using the resources that it has. It goes without saying that no individual has unlimited resources compared to her needs. The amount of corn that the family farm can produce is limited by the amount of resources it has. As a result, the family is forced to make a choice between the different goods and services that are available. It can have more of a good or service only by giving up some amounts of other goods or services. For example, if the family wants to have a bigger house, it may have to give up the idea of having a few more acres of arable land. Everyone faces scarcity of resources, and therefore, has to use the limited resources in the best possible way to fulfill her needs.

Production, exchange and consumption of goods and services are among the basic economic activities of life. In the course of these activities, every society has to face scarcity of resources, which gives rise to the problem of choice. The scarce resources of an economy have competing usages. In other words, every society has to decide on how to use its scarce resources. The problems of an economy are often summarised as follows:

What is produced and in what quantities? Every society must decide how much of each of the many possible goods and services it will produce. Whether to produce more food or more luxury goods; more agricultural goods or more industrial products; more resources in education or in military services.

How are these goods produced? Every society has to decide how much of which of the resources to use. Whether to use more labour or more machines. Which of the available technologies to adopt.

For whom are these goods produced? This concerns how the produce of the economy should be distributed among the individuals. Who gets more and who gets less? Whether to ensure a minimum amount of consumption for everyone.

Thus, every economy faces the problem of allocating the scarce resources and distributing the final goods and services.

The collection of all possible combinations of the goods and services that can be produced from a given amount of resources and a given stock of technological knowledge is called the production possibility set of the economy. Consider an economy which can produce corn or cotton. Table 1.1 gives some combinations of corn and cotton that the economy can produce when its resources are fully utilised.

The curve representing these combinations is called the production possibility frontier (PPF). The PPF gives the maximum amount of corn that can be produced for any given amount of cotton and vice-versa. It gives the combinations of corn and cotton that can be produced when the resources of the economy are fully utilised. Note that a point lying strictly below the production possibility frontier represents a combination that will be produced when all or some of the resources are either underemployed or are utilised in a wasteful fashion. To have more of one good, we will have less of the other. This is the opportunity cost of an additional unit.