class 12 central problems of an economy notes

Central problem of Economy..........short and easy notes for board exam.

1. What do you mean by capitalist economy? What are its characteristics?

> Capitalist economy is that economy in which all factors of production are controlled and regulated by private organisation.

Following are its characteristics;

• Law of inheritance are present. Transfer of property of dead person to its heir. 
• Economic freedom are present-  (A) Freedom to work   (B) Freedom to choise  (C) Freedom of saving and investment.
• Free trade policy is adopted. Market economy is an open economy.
• Competition is an essential feature of market economy.
• Price are determined by demand and supply force.

2. What do you mean by socialist economy? What are its characteristics?

> In socialist economy all economic system are controlled and regulated by government to ensure better opportunity to the society.

Following are its characteristics;

• All factors of production are controlled by government.
• Right of individual property has no price.
• Economic freedom remains absent.
• Price are determined by government.
• Absence of competition.
• Positive role of government.
• Maximum social welfare.

3. What do you mean by mixed economy? What are its characteristics?

> it is Golden mixture of capitalist and socialist economy. What economic system are found. There is a freedom of economic activity and government interference for the sake of social welfare.

Following are its characteristics;

• Co-existence of public and private ownership.
• Economic freedom are present but government adopted many control to check individual freedom.
• Price mechanism is found. Profit motive is managed by the government.
• Limited competition appears.
• Existence of private property but controlled.
• Economic disparities is but controlled.

4. What is economic problem? What are its causes?

> Economic problem is problem of choice because wants are unlimited but means to satisfy those wants are limited. Economic problem is concerned with the use of limited resources to satisfy unlimited wants. 

Following and its causes;

• Human wants are unlimited. Thus, all human want can't be satisfied.
• Intensity of wants differ from man to man.
• Resources are limited.
• There are alternative uses of resources.
• Therefore, problem arises and this problem of choice is also called as economic problem.

5. What do you mean by central problem of economy?

Different economic system followed different method of operation. But due to scarcity of resources the all phases problem of choice between Limited means and unlimited wants. These problem are called central problem of economy.
Every economic has five basic problems;

(1) what to produce:-

   (A) Consumer goods.

   (B) Capital goods.

   (C) Necessary goods.

   (D) luxury goods.

   (E) Private goods.

   (F) Pubic goods.

(2) How to produce:-

   (A) labour intensive technique.

   (B) capital intensive technique.

(3) For whom to produce:-

   (A) Personal distribution.

   (B) Functional distribution.

(4) How to achieve optimum utilization of resources.

(5) how to achieve economic growth.

6. What do you mean by Production Possibility Curve (PPC)? What are its characteristics?

> Production Possibility Curve (PPC) is based on analysis that factor of production are limited but goods to be produced are unlimited. As a result problem of choice arises among alternative uses. The economy faces alternative combination of production, which are called Production Possibility (PP). If these combination are represented on graph it is called Production Possibility Curve (PPC).

Following are its assumptions;

• Factor of production are limited, but they can be transfer from one use to other.
• All factor are fully and efficiently used.
• Technology of production remain constant.
• Only two goods are being produced.

Following are its features;

• PPC slopes downward from left to right.
• PPC is concave to the origin.
• Slope of PPC = ▲Y/▲X  or amount of goods 'Y' lost/amount of goods 'X' gain

        It can be shown on the following table;

        It is also shown on the graph;

• 'OX' shows production of wheats.
• 'OY' shows production of machine.
• When 'X' and 'Y' curve connected, it is known PPC.
•  PPC is also known as transformation curve.

7.What do you mean by opportunity cost?

> opportunity cost referred to the value of factors in its next best alternative use. Opportunity cost of the goods is that quantity of goods which we have to sacrify.

For example; from limited resources we produce, wheat or machine. Wheat of Rupees are 5 lac, and machine of rupees 4 lac. In this case, producer will produce wheat rather than machine. In this way sacrificed value of the machine will be called the opportunity cost of wheat worth of rupees 5 lac.

8. What do you mean by marginal opportunity cost?

> decrease in production of goods 'Y' to increase in production of an additional unit of goods 'X' is called marginal opportunity cost. 

Marginal opportunity cost = ▲Y/▲X.

POINTS;

1. Central problem of economy:-

• Allocation of resources.
• Optimum utilisation of resources.
• Economic development.

2. Economic problem is basically a problem of choice. 

3. Economy may be classified in,

• capitalist economy  
• socialist economy 
• mixed economy.

4. Central problem of economy are;

• What to produce.
• How to produce.
• How to distribute.

5. In capitalist economy, coexistence of public and private sector.

6. Main objective of mixed economy is to provide maximum public welfare.

7. Price mechanism found in capitalist economy. Through demand and supply theory.

8. The slope of Production Possibility Curve falls downward from left to right.

9. PPC is concave to the axis or origin.

10. PPC shows economic problem.

11. Economic problem arises because wants are unlimited and means are limited.

12. PPC also known as transformation curve.

13. Marginal opportunity cost = loss in production of goods Y/gain in production of goods X  or ▲Y/▲X

     THE END