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Economics Class 02

REVISION OF THE PREVIOUS CLASS (01:19 PM)

BASIC CONCEPTS (01:21 PM)

  • An economist's task is to assess whether the current utlisation of resources is optimal or not.
  • To do this, an economist uses two basic tools:
  • 1. Identifying the budget constraints:
  • It is the limiting resource(s) identified that will limit the output.
  • This limiting resource can change over time.
  • Given a budget constraint, and identifying the prevailing technology that is the use of these limited resources, an economist identifies the maximum that can be sustainably produced.
  • This is the PPF.
  • 2. Constructing a PPF (Production Possibilities Frontier):
  • There are several ways in which the limited resource can be utilised.
  • It is not an economist's choice as to how they will be utlised- An economist is not required to reveal her preferences unless specifically required to.
  • It is a political decision.
  • An economist constructs a set of potential outputs that is the maximum output that can be sustainably produced given the budget constraint, available technology, and various possibilities of using it.
  • A PPF, therefore, is a normative concept- each economist will have their own assessment of Budget constraint (BC) and available technology.
  • The idea is that you can't sustainable produce more than it, and should not produce less than it.
  • Thus, a PPF represents those levels of possible output that are both possible as well as desirable.
  • The actual level of output for a developed country is expected to be close to its potential output (PPF).
  • This is because the existing resources are competitively and efficiently utilised as such there is less scope for further growth.
  • In order to grow, the country would have to shift its PPF forward that is either discover new resources or develop new technology to better utilise existing resources.
  • For a developing country, the actual output is expected to be far away from its potential PPF.
  • Hence, there is a greater potential for growth- simply through better utilisation of existing resources with the available technology.

MARGINAL COST AND OPPORTUNITY COSTost and opportunity cost (02:11 PM):

  • Marginal cost (MC):
  • It refers to the extra cost incurred in producing one more unit, given the current production of some units.
  • An economist assesses whether the MC is high/low, increasing or decreasing to estimate whether one more unit can be sustainably produced with the given resources.
  • Hence, it is an important tool to determine the potential output.
  • For the decision-maker, MC helps in assessing whether producing one more unit is viable or not that is whether MC is bearable or not.
  • Opportunity Cost (OC):
  • It refers to the benefits foregone while making a choice that is when one option is preferred over another.
  • It implies the willingness of a decision-maker to forego the additional benefits associated with a rejected option over the extra benefits obtained by choosing the preferred option.
  • The benefits that were foregone are called the opportunity of the decision.
  • *A decision maker is one that enjoys the benefits of the decision taken and also bears the opportunity cost of the lost potential benefits.
  • *MC is usually denominated in terms of the resource required to produce one unit, whereas OC is denominated in terms of the benefit (output) not realised.

TYPES OF GOODS- APPLICATION OF LAW OF DEMAND AND SUPPLY (02:49 PM)