ECONOMICS AS A SCIENCE

Economics is the study of how individuals and societies allocate scarce resources to satisfy unlimited wants.

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Professor Lionel C. Robbins defined economics as the science which studies human behavior as a relationship between ends and scarce means which have alternative uses. This definition emphasizes the scarcity of resources and the choices individuals and societies make to allocate them.

          1.1     CONCEPTS OF ECONOMICS

• Wants: Desires for goods and services that can satisfy human needs. Wants are unlimited and vary from person to person.
• Scarcity: The condition that arises because resources are limited while human wants are unlimited. Scarcity necessitates choice.
• Choice: The decision-making process that individuals and societies undergo to allocate scarce resources among competing wants.
• Scale of Preference: A ranking of wants in order of priority. It helps individuals and societies decide which wants to satisfy first.
• Opportunity Cost: The value of the next best alternative that is forgone when a choice is made. It emphasizes the cost of missed opportunities.
• Rationality: The assumption that individuals make decisions aimed at maximizing their utility or satisfaction based on available information.
• Production: The process of converting inputs (factors of production) into outputs (goods and services).
• Distribution: The process of delivering goods and services to consumers. It involves how income and wealth are shared among individuals and groups.
• Consumption: The use of goods and services by consumers to satisfy their wants and needs.

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TYPES OF ECONOMIC PROBLEMS

1. What to Produce: Deciding which goods and services to produce based on consumer preferences and resource availability.
2. How to Produce: Determining the methods and processes to use in the production of goods and services, considering efficiency and cost-effectiveness.
3. For Whom to Produce: Deciding who will receive the produced goods and services, often based on income distribution and social equity.
4. Efficiency of Resource Use: Ensuring that resources are used in a way that maximizes output and minimizes waste, often assessed through productivity measures.

1. APPLICATION OF PPC (PRODUCTION POSSIBILITY CURVE) TO SOLUTION OF ECONOMIC PROBLEMS

Definition of PPC: A graphical representation that shows the maximum possible output combinations of two goods that can be produced with available resources and technology.

Application of PPC (Production Possibility Curve) to Solution of Economic Problems – Efficiency:

• Point Placement: Points on the PPC curve represent efficient production levels, while points inside the curve indicate inefficiency.
• Opportunity Cost: The slope of the PPC illustrates the opportunity cost of producing one good over another. As production shifts from one good to another, the opportunity cost increases.
• Economic Growth: An outward shift of the PPF indicates economic growth, which can occur due to an increase in resources or improvements in technology.
• Trade-offs: The PPC demonstrates the trade-offs between different goods, helping to visualize the choices that must be made in resource allocation.

1.4     ILLUSTRATION OF A PRODUCTION POSSIBILITY CURVE AND ITS INTERPRETATIONS