MAHATMA GANDHI INSTITUTE OF TECHNICAL EDUCATION AND RESEARCH CENTER

ENGINEERING ECONOMICS AND MANAGEMENT PREPARED BY: E & C 2 nd YEAR 1. Smit M. Chauhan Arjun M. Gupte Ankita T. Zangid Jagruti N. Gite

TOPIC: BASIC ECONOMICS PROBLEMS UNEMPLOYMENT INFLATION

BASIC ECONOMIC PROBLEMS Economics is the study of the division of scarce resources between unlimited needs and wants" Let us explain further. You are the head of your household. There are several things which are needed to keep the household running, e.g. food, electricity, gas and so forth. There are also wants, which may not have to be fulfilled per se, but will be acquired somehow. A store manager has a limited budget to spend on various wants, his resources are scarce. He could spend his money on providing more staff, bringing in more stock from a wholesaler, marketing his product to increase demand through advertising, decorating or improving his store and paying for essential services like water and electricity

Effectively he has unlimited wants but limited means or resources. We say that his resources are scarce. The store manager must economic by choosing to use his resources to satisfy certain wants such as marketing instead of others like stock purchase. As earlier stated, economics is the study of the division of these resources to best satisfy the unlimited wants. Every economy in the world face three main basic economics problems because the needs and wants of the society are unlimited but the resources available to satisfy those are limited. Whether a country is rich or poor this is a common situation to all of them.

All societies face the economic problem, which is the problem of how to make the best use of limited, or scarce, resources. The economic problem exists because, although the needs and wants of people are endless, the resources available to satisfy needs and wants are limited.

Limited resources Resources are limited in two essential ways: 1.Limited in physical quantity, as in the case of land, which has a finite quantity. 2.Limited in use, as in the case of labour and machinery, which can only be used for one purpose at any one time. Samuelson's three questions America’s first Nobel Prize winner for economics, the late Paul Samuelson, is often credited with providing the first clear and simple explanation of the economic problem - namely, that in order to solve the problem of scarcity all societies, no matter how big or small, developed or not, must Endeavour to answer three basic questionsPaul Samuelson

What to produce? Societies have to decide the best combination of goods and services to meet their needs. For example, how many resources should be allocated to consumer goods, and many resources to capital goods, or how many resources should go to schools, and how many to defense, and so on. How to produce? Societies also have to decide the best combination of factors to create the desired output of goods and services. For example, precisely how much land, labour, and capital should be used produce consumer goods such as computers and motor cars.

For whom to produce? Finally, all societies need to decide who will get the output from the country’s economic activity, and how much they will get. For example, who will get the computers and cars that have been produced? This is often called the problem of distribution.

The Basic Problem - Scarcity Scarcity is one of the most basic economic problems we face. We run into scarcity because we are a society with unlimited wants, but limited resources. Therefore, we have to choose. We have to make trade-offs. We have to efficiently allocate resources. We have to do those things because resources are limited and cannot meet our own unlimited demands. Without scarcity, the science of economics would not exist. Economics is the study of production, distribution, and consumption of goods and services. If society did not have to make choices about what to produce, distribute, and consume, the study of those actions would be relatively boring.

Society would produce, distribute, and consume an infinite amount of everything to satisfy the unlimited wants and needs of humans. Everyone would get everything they wanted and it would all be free. But we all know that is not the case. The decisions and trade-offs society makes due to scarcity is what economists study. Why are certain decisions made and what is the next best alternative that they had to foregot?

Scarce Goods And Services As noted above, if scarcity did not exist, all goods and services would be free. A good is considered scarce if it has a non-zero cost to consume. In other words, it costs something. Almost every good we as individuals or as society consume costs something and is scarce. By consuming one good, another good is foregone. Therefore, scarcity forces decisions and trade-offs to be made. Why are some scarce goods more expensive than other scarce goods? The cost of a good is a signal of its scarcity. One good may be more scare than another, either because of limited resources or higher want (demand) for that good.

Lets take two scarce goods - shark meat and chicken. Both have a non-zero cost/price, but we would all agree shark meat is much more expensive to buy than chicken. Why is that? The resources to produce shark meat are largely limited by the labor and capital it takes to catch a shark, while the labor and capital required to produce chicken is less limiting. Even though the resources to produce both are limited, there is much more labor and capital available to produce chicken than shark. Not to mention the quantity of sharks is also much more limited than that of chickens.

If the unlimited wants and needs of a particular good can be met by resources, then it's not considered scarce. This would require the resources to be unlimited as well for it to meet unlimited demand. What would be an example of a non-scarce good? Think about what you do every day. Can you think of something you consume or use that is free? Something that you have infinite access to and you would never expect to run out? Air. Air is a good that everyone has unlimited access to, and no one has to pay to consume it!

UNEMPLOYMENT: DEFINITION OF 'UNEMPLOYMENT' Unemployment occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy. The most frequently cited measure of unemployment is the unemployment rate. This is the number of unemployed persons divided by the number of people in the labor force. Many different variations of the unemployment rate exist with different definitions concerning who is an "unemployed person" and who is in the "labor force."

For example, the U.S. Bureau of Labor Statistics' commonly cites the "U-3" unemployment rate as the official unemployment rate but this definition of unemployment does not include unemployed workers who have become discouraged by a tough labor market and are no longer looking for work. The various schools of economic thought differ on their explanation of the cause of unemployment. Keynesian economics proposes that there is a "natural rate" of unemployment because the skills of laborers and the positions available are slightly out of sync even under the best economic conditions. Neoclassical economics defines that the labor market is efficient if left alone, but that various interventions, such a minimum wage laws and unionization, put supply and demand out of balance.

INFLATION DEFINITION OF 'INFLATION' The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling. Central banks attempt to stop severe inflation, along with severe deflation, in an attempt to keep the excessive growth of prices to a minimum. INVESTOPEDIA EXPLAINS 'INFLATION' As inflation rises, every dollar will buy a smaller percentage of a good. For example, if the inflation rate is 2%, then a $1 pack of gum will cost $1.02 in a year. Most countries' central banks will try to remain an inflation rate of 2-3%.