LEARNING OBJECTIVES 1.1 Introduction 1.2. Scarcity 1,3. Economic Problem 1.4 Meaning of Economics 1.5. Positive Economics and Normative Economics 1.6 Microeconomics and Macroeconomics 1.7. Central Problems of an Economy 1.8 Opportunity Cost 1.9 Production Possibility Frontier (PPF) 1.10 Solved Practicals 1.1 INTRODUCTION Every field of study has its own language and its own way of thinking. For example, mathematics talks about algebra, science deals with experiments, accounts deal with profit and loss and so on. Economies is no different. An Economist's language consists of terms like demand, supply, market, etc. In the coming chapters, you will come actoss many new terms and some familiar words that economists use in specialized ways. ‘The most important purpose of this book is to help you understand an economist’s way of thinking. Ofcourse, as one cannot become a mathematician overnight, in the same way, learning to think like an economist will take some time. Yet with a combination of theory, numericals and live examples, this book will give you ample opportunity to develop and practice this skill. Before we proceed to the meaning of economics, let us first understand the meaning of economy and reason for studying economics, What is an Economy? ‘You must have observed many activities happening around you in your daily life, For instance, you may have seen factories, mines, shops, offices, flyovers, railways, etc. All these institutions 1” Introductory Microeconomic, and organisations may be collectively called an economy. Si uch units enable people to ean ay income and, at the same time, help to produce goods and services which people require for iy An economy is a system which provides people, the means to work and earn a living, Itis an organisation that provides living to the people. In this task, it makes use of the available resources to produce those goods and services that people want. For example, Indian econo, consists of all sources of production in agriculture, industry, transport and communication banking, etc Vital Processes of an Economy , Economy is a system which provides living to the people. For this objective to be fulfilled, itis necessary that every economy should undertake three economic activities: 1. Production 2, Consumption 3. Investment or Capital Formation. These economic activities are known as the essentials or the vital processes of an economy, On the basis of nature of economic activities, economies can be broadly classified as: Market Economy and Centrally Planned Economy. It is given in Power Booster Section for knowledge enrichment. Why Study Economics? We go to a cinema hall to watch a movie. We go toa restaurant to eat. We attend school to get educated or to be able to earna living. Itmeans, every activity is conducted for a specific reason. Economics is studied because it enables us to understand different aspects of the economy. However, the main reason for study of economics can be simplified to a single word — Scarcity. Weall know, human wants are more than the available resources. So, there is a need to allocate these scarce resources for the satisfaction of never ending human wants. Hence, Economics is concerned with selection of resources under conditions of scarcity. Let us now understand the concept of ‘Scarcity; the root of all economic problems. 1.2 SCARCITY Scarcity refers to the limitation of supply in relation to demand for a commodity. Itrefers to the situation, when wants exceed the available resources. As a result, goods are not readily available and society does not have enough resources to satisfy all the wants of its people: Scarcity is universal, i.e. every individual, organisation and economy faces scarcity of resources: Scarcity of resources calls for economizing of resources. Economizing of resources refers to making optimum use of the available resources. There is a need to economize, as we have © satisfy our unlimited wants out of limited resources, Scarcity is not the only problem! * Limitation of resources is not the only problem. In addition to being scarce, resources also have alternate (different) uses. Alternate use of resources means that a resource can be put 10 ‘more than one use.Chapter1 > Introduction 13 + For example, we all know, petrol is scarce problem. In addition to i railway engines, airplane in relation to its demand. But there is one more scarcity, it is used not only in vehicles, but also in machines, generators, etc, + Whenever, a commodity is chosen for one use, other valuable uses will have to be rejected. It gives rise to the problem of choice, For, “Scarcity and Choice go together’, refer HOTS, 1.3 ECONOMIC PROBLEM As we know, human wants are unlimited, but the means to satisfy them are limited. Therefore, all our wants cannot be fulfilled. In order to maximise satisfaction, every consumer exercises choice, as to which goods should be consumed and in what quantity. An economic problem is basically a problem of choice. Economic Problem is a problem of choice involving satisfaction of unlimited wants out of limited resources having alternative uses. Reasons for Economic Problem The 3 main reasons for existence of economic problems are: (i) Scarcity of Resources: Resources (i.e. land, labour, capital, etc.) are limited in relation to their demand and economy cannot produce all what people want. It is the basic reason for existence of economic problems in all economies. Scarcity is universal and applies to all individuals, organisations and countries. There would have been no problem, if resources were not scarce. (ii) Unlimited Human Wants: Human wants are never ending, ie. they can never be fully satisfied. As soon as one want is satisfied, another new want emerges. Wants of the people are unlimited and keep on multiplying and cannot be satisfied due to limited resources. Human wants also differ in priorities, ic. all wants are not of equal intensity. For every individual, some wants are more important and urgent as compared to others. Due to this reason, people allocate their resources in order of preference to satisfy some of their wants. Ifall human wants had been of equal importance, then it would have become impossible to make choices. (iii) Alternate Uses: Resources are not only scarce, but they can also be put to various uses. It makes choice among resources more important. For example, petrol is used not only in vehicles, but also for running machines, generators, etc. As a result, economy has to make choice between the alternative uses of the given resources. Resources Vs Human Wants Features of Resources: (i) They are scarce, i.e, their supply is limited in relation to demand. (ii) They have alternative uses. Features of Human wants: (i) They are unlimited, i.e. they can never be fully satisfied. . (ii) They differ in priorities.